Image source: The Motley Fool.
Banco BBVA Argentina S.A. (BBAR -2.55%)
Q3Â 2020 Earnings Call
Nov 25, 2020, 10:00 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 Third 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 Grinner -- Investor Relations Manager
Hello, everyone, and welcome to the BBVA Argentina earnings conference call for a discussion of our third 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 expectation 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 this risk, 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 during today's call 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 that starting January 1, 2020 as per Central Bank's 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 September 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 the third 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 branch network. The Bank has provided its clients through its traditional and digital channels, not only it's wide range of products, but also all possible support that has surged through the health emergency regulation implemented by the Argentine government.
Regarding digital transformation, the penetration of digital clients reached 71% from 69% on the -- and the penetration of mobile clients reached 59% from 57% in the prior quarter. Moreover, digital branches have been launched in October '20 combining several features between human capital and structure facilities to promote client self-service aiming to digitalize and migrate clients to remote channels. In terms of responsible banking, BBVA Argentina keeps working toward its sustainability model, supporting responsible business actions regarding inclusion, financial, education and environmental protection, as part of its compromise with the country. Meanwhile, the Bank closely monitors the impact of the pandemic over this business, financial conditions and operating results in the aim of anticipating possible actions to optimize value for its shareholders and it keeps the solidity it has widely developed for as long as the volatility and uncertainty as seen during 2020 remains.
I will now comment on the Bank's third 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 the previous periods provided for comparative purpose, unless otherwise noted. BBVA Argentina's third quarter 2020 net income including inflation adjustment effects totaled ARS2.83 billion, 2.9% higher than the ARS2.75 million posted a quarter ago and 65.4% lower than the ARS8.19 billion posted a year ago. The quarter-over-quarter increase is mainly explained by a lower income tax derived from a reduced taxable base, additional to temporary differences between fiscal and accounting inflation adjustment regulations. The year-over-year decrease is partially explained by the impact of the pandemic and the sharp contraction of the interest rate as a consequence of the monetary policy implemented by the government during 2020.
In the third quarter, net income from writedown of assets at amortized cost and at fair value through other comprehensive income reflected a loss of ARS4.0 billion, 79.3% greater than that recorded in the prior quarter. 72% of the result in this line is mainly explained by the accumulation inflation adjustment in other comprehensive income of the remaining position in US dollar linked notes LELINK, which the Bank exchanged in the voluntary swap offered by the National Treasury on July 17, 2020. In the quarter, net interest income totaled ARS16.6 billion pesos, ARS2.6 billion lower than the result posted in the second quarter of 2020 and 25.6% lower than the result posted a year ago. The decline is mainly explained by an increase in the average minimum rate of time deposit and of interest-bearing checking accounts, in addition to a switch in deposit mix from site deposits to time deposits. All of these, which offset the greater income derived from a higher position in Central Bank LELIQ.
Income from government securities increased by 34.1% compared to the second quarter of 2020 and fell 38.4% compared to the third quarter of 2019. The sequential increase is explained by increase in the LELIQ position as a consequence of the increment in time deposits, combined with Central Bank regulations that enable a higher excess LELIQ position in line with what was granted in time deposits at minimum rate. Interest income from loans and other financing totaled ARS14.8 billion, decreasing 3.3% quarter-over-quarter. This is explained mainly by the contraction in overdraft and direct consequence of the economic situation partially offset by the pickup in credit card transactions and loans to the prefinancing and finance in exports mainly in pesos.
In third quarter 2020 interest from time deposits represented 86.4% of the Bank's total interest expenses, increasing 48.5% in the quarter. Net fee income amounted to ARS3.0 billion, 10.2% lower quarter-over-quarter. This contraction is explained by fees from credit card consumption received during the second quarter and in a lower extent by the slight pickup in expenses as a consequence of the surge in the activity. If fees from credit card consumption received in the second quarter were excluded, net fee income in the third quarter would have increased 27.7% quarter-over-quarter. Net income from financial instruments at fair value totaled ARS886 billion -- million decreasing 34.8% quarter-over-quarter. This is explained by the lower volume in income from government securities explained by the reduction of exposure to LELIQs here in the last month of the quarter. In the third quarter of 2020, FX gain including foreign currency forward transactions totaled ARS1.6 billion, increasing 0.5% quarter-over-quarter due to an increase in results from purchase and sale of foreign currency derived from a surge in activity.
Moving on to the expenses during the third quarter of 2020. Personnel and administrative expenses totaled ARS8.9 billion, increasing 6.5% quarter-over-quarter and decreasing 12.1% year-over-year. Personnel benefits extended 7.3% in the quarter reaching ARS4.6 million. This increase is mainly explained due to the increment in salaries as a consequence of a collective bearing agreement with labor unions on July 16, 2020. Administrative expenses grew 5.7% in the quarter, mainly explained by an increment in armored transportation services derived from the surge in activity and increased FX market restrictions enforced in September, partially offset by savings the in administrative services and rentals. The accumulated efficiency ratio as of third quarter of 2020 was 58%, above the 54.7% and the 43.9% reported in the second quarter of 2020 and in the third quarter of 2019 respectively. The increase is explained by a higher percentage increment of the expenses of the net income, which was -- which has been mainly affected by the increase in financial expenses. Excluding inflation adjustments included in the lines, income from monetary position and net income from writedown of assets at amortized cost and at fair value through OCI, the accumulated efficiency ratio as of the third quarter of 2020 would reach 46.2%.
In the third quarter of 2020 other operating expenses contracted 11.2% quarter-over-quarter, due to the reduction in the turnover tax for the recognition of the advanced payment of this tax for 2021 in the City of Buenos Aires. On the other hand, there is also a reduction in other operating expenses as a consequence of the release of legal provisions. In terms of activity, the Bank financing to the private sector totaled ARS258.6 billion, increasing 4.1% quarter-over-quarter and decreasing 10.6% year-over-year both in real terms. BBVA Argentina consolidated market share over the private sector loans as of September 2020 reached 8.25% from 8.13% in the third quarter 2019. Loans to the private sector in pesos remained flat quarter-over-quarter and increased 12% in the year. Dollar denominated loans decreased 22.8% quarter-over-quarter, measured in pesos and 29.3% measured in dollars, mainly driven by the contraction in the Bank of loans in foreign currency.
Regarding the retail portfolio including mortgage, pledge, consumers and credit card loans, these have increased 7.3% quarter-over-quarter and fell 1.5% year-over-year. In the quarter, the greatest increase are reflected in pledge loans and credit card loans. The latter boosted by Ahora 12 and Ahora 18 programs. Commercial loans including overdrafts, discounted instruments, leasing, foreign trade and other loans fell 15.3% quarter-over-quarter and 19.9% year-over-year. The quarterly decrease is mainly explained by a 41% decline in overdraft and a 27.6% decline in loans for the prefinancing and financing of exports. This was partially offset by a 15.7% increase in discounted instruments and a 2.2% increase in company loans.
As of September 30, 2020, the Bank had ARS47.9 [Phonetic] billion in COVID-19 supported credit lines. In the third quarter 2020 gross loans to deposit ratio was 66% compared to the 79% a year ago. As of September 2020 asset quality measured as total non-performing portfolio over total portfolio reached 1.16%, the lowest in the last 12 months. This ratio was positively affected by a temporary flexibility in BCRA regulations regarding debt classification during the COVID-19 pandemic, which extends grace periods in 60 days before a loan is classified as non-performing and suspense the mandatory reclassification of clients that have been in irregular performance with other institutions by a regular performance with the Bank. These waivers are in effect until December 31, 2020.
The covenant ratio allowance over total non-performing portfolio increased to 355.26% in the third quarter of 2020 from 269.38% in the second quarter of 2020. This is explained by a decrease in non-performing loans, which is greater than the increase in allowances as a consequence of the implementation of impairment models and the continuing effect of waivers enforced through BCRA regulations regarding debt classification. Cost of risk, loan loss allowances over average total loans reached 1.37% lower than the 4.27% recorded in the second quarter of 2020. It is mainly explained by an adequate evolution in credit quality, especially in the commercial portfolio.
Allowances for the Bank in the third quarter of 2020 reflect expected losses driven by the adoption of the IFRS 9 standards as of January 1, 2020, expect for debt instruments issued by nonfinancial government sector which were temporarily excluded from the scope of such standard. In the third quarter, exposure to the public sector, excluding Central Bank instruments measured as a percentage of total assets reached 4.3% above the 3.3% recorded in the prior quarter. Our total exposure to the public sector excluding Central Bank notes was ARS25.1 billion above the ARS19.2 billion in the prior quarter. It is worth noting that on July 17 the Bank participated in the voluntary swap offered by the National Treasury and swapped its remaining position in sovereign US dollar linked notes LELINK in the exchange of bundle of sovereign bonds in pesos adjusted by inflation BONCER maturing in 2023 and 2024. This left the Bank portfolio virtually free of US dollar and US dollar linked denominated securities.
On the funding side, private sector deposits in the third quarter of 2020 totaled ARS393 billion remaining flat quarter-over-quarter and growing 6% when compared with the third quarter of 2019. Private sector deposits in local currency were ARS279 million -- billion increasing 2.2% quarter-over-quarter and 33.8% year-over-year. This is mainly explained by the strong growth in time deposits, especially of investment accounts and the lesser extent by the growth of checking accounts. Private sector deposits in foreign currency decreased both measured in pesos and in dollars. Towards the end of the quarter US dollar deposit withdrawal increased as a consequence of the enhanced restrictions over the FX market. After operability was reestablished under new Central Bank regulations foreign currency deposit withdrawal slowed down returning to levels observed during previous months.
As of September 2020 BBVA's transactional deposits including checking and saving accounts represent 63.1% of total deposits from 66.4% a year ago. BBVA Argentina consolidated market share on private sector deposits as of September 2020 reached 6.48%. In terms of capitalization BBVA Argentina continues to show strong solvency indicators, accounting excess capital of ARS61.9 billion entailing a total regulatory capital ratio of 23.3% and a Tier 1 ratio of 22.6%. The Bank's aim is to make the best use of the excess capital. The Bank's liquidity ratio in pesos and dollars remained healthy at 51.1% and 86% of total deposits as of September 30 respectively.
Last but not least, on November 20, the General Extraordinary Shareholders Meeting approved the distribution of our complementary cash dividend for the sum of ARS12 billion through the partial write-off of the Optional Reserve for future distribution of earnings with the aim to increase the ARS2.5 billion cash dividend approved in the shareholders meeting of May 15, 2020 subject to BCRA approval. This -- with this additional dividend, the payout ratio would reach 46%.
This concludes our prepared remarks. We'll now take your questions. Operator, please open the line for questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gabriel Nobrega with Citi. Please go ahead.
Gabriel da Nobrega -- Citigroup Inc -- Analyst
Hi, everyone. Good afternoon and thank you for the opportunity to ask questions. I actually have two questions. The first is on the level of provisioning. We saw a large decrease in this quarter. I understand that it is because you were extremely comfortable. Your coverage ratio is well above 300%, if I'm not mistaken, this is the new historical high. So I wanted to understand, even though you still don't have a clean picture of the NPL due to the waivers from the Central Bank, I would just like to understand if you believe that you are going to keep making the same level of provisioning for the coming quarters? And I'll ask the second question afterwards. Thank you.
Ines Lanusse -- Investor Relations Officer
Hi, Gabriel, nice to talk to you. Okay. Yes, as you mentioned today, we have a question work on when the waivers of the Central Bank will be taken out. So regarding are more asset projection for NPL which does not increase just waiver, we are projecting NPL to be around 1.90% by the end of 2020 and going a little bit higher even more higher in 2021, reaching levels of 2.9% or around 3%. I mentioned the level of provisions we feel very confident and very high. You should see an increase in provisioning in the fourth quarter, namely by changing the variables affecting the IFRS 9 model. So that and also considering that our NPL will decrease -- sorry will increase our NPL in the fourth quarter should increase mainly because of the growth rate portfolio that make the progress go a little bit further down by the end of 2020.
For 2021, again, it's more a question, we see other question on how NPLs will perform, we know they should get rid of the word the way right, at the end of the day define how the rational behaves. But yes, provisioning should increase in the fourth quarter, but again, mainly because of the changing in the IFRS 9 projection.
Gabriel da Nobrega -- Citigroup Inc -- Analyst
Okay, perfect. And then I'll ask my second question. It's actually on your net interest income. So, we have seen that since the first quarter, this has decreased a lot. While I understand that there's an effect here from the increase in the BADLAR rate. It's still a significant decrease versus your peers. So if you could just maybe comment, what's going on here? What's going to be different than what the other Argentinean banks are seeing? And also, as we're starting to see the Central Bank increasing interest rates again. What do you think should be the trajectory for your net interest income in the fourth quarter? Thank you.
Ines Lanusse -- Investor Relations Officer
Okay. For the fourth quarter, we believe, you should -- you probably would see an increase in our net interest income mainly because activity should start to increase, but that also is a little bit, increase slightly due to the kind of activity with increase in cost of funds of value. As we mentioned also that time deposits are increasing, we are paying a minimum, so that increase in activity -- that would increase our interest income. Increase will be a little bit compensated by the increase of cost of funds. Going more toward 2021, we are also expecting activity to increase probably going more to similar levels as 2019. But again, we should have -- we see the pressure on the cost of funds and that probably we have said they are using in loans, it's a question of mix and also going more into the genuine activity of the bank which is lending, it is more tied to that becoming the demand, that we saw in the last quarter the essence of the subsidized loans that we're taking out and now they're starting to decrease again despite, we are seeing some pickup in the retail business.
Gabriel da Nobrega -- Citigroup Inc -- Analyst
Thanks. And then if you just allow me to follow-up here. Since you talked about, there is some demand question. We saw the new regulation for the subsidized loans as I think 30% for SMEs, do you expect to start offering a lot of these and maybe could this lead to a pickup in demand for the fourth quarter and for 2021 as well?
Ines Lanusse -- Investor Relations Officer
Its difficult to predict. We have lended, for example, that's a factor that's lines of 24%. Now it's starting to reduce that demand, but also because we are obliged to lend a 7.5% of deposit base. As of November 1, we have already guided ARS5.9 billion in this new line, which is not -- you have to place it is more -- it's not offset. So basically, the demand for these type of loans is coming from that side. Going forward, we need to see the macroeconomic conditions to become more stabilized, and there we should see a pickup in loan demand.
Gabriel da Nobrega -- Citigroup Inc -- Analyst
Perfectly clear. Thank you so much.
Operator
The next question is from Alejandra Aranda with Itau. Please go ahead.
Alejandra Aranda -- Itau BBA -- Analyst
Hi, Ines. Could you tell us the percentage of loans we program. And if you could discriminate that between credit cards and the rest of your portfolio. And remind me, you said, what was the percentage of loans at the subsidized rate that you already had -- that you already have on your portfolio?
Ines Lanusse -- Investor Relations Officer
Okay. The support lines -- support line for the 24% is zero interest rate and on those lines that we are implementing for COVID represent ARS47.6 billion. Now this new regulation compulsory credit line which is communication 71.40 as of November 20, we have already granted ARS5.9 billion. So the lines granted for the COVID or on the COVID lines now are going into the compulsory credit lines. Regarding the deferred loan from the total loan book, they represent approximately 17% of the total book and it's mainly composed by the credit card business.
Alejandra Aranda -- Itau BBA -- Analyst
Okay, perfect. And two more questions if I may. In terms of fees, could you give us some color on what to expect for the next year and for 4Q and also for growth in loans on deposits?
Ines Lanusse -- Investor Relations Officer
Yes. Regarding fees on the fourth quarter, you should see them go a little bit further down because the PBT would start to increase. So you should see acquisitions of course starting to increase. You already saw some of that in the third quarter, despite if you had excluded that one-time gain we had in the second quarter, you would have seen an increase in fees. Going forward to 2021, again, tied to the increase in inflation -- sorry, increase in the activity, you could see -- you are going to see some increase in some products -- commission for some products basically credit cards and safety buckets. We are projecting increases for January, June and October. Expenses to grow in line with inflation. And again, we should see some more client acquisition costs that probably you do see in 2020 that you're going to see in 2021. Probably that trend should take as a reference what happened in 2019.
We expect to have a trend similar to what happened that year. Going to loan growth, to give you an idea, year-to-date with a figures of October, the Bank in nominal terms, the Bank has been growing around 32% above the system. That profit was growing around 40%, a little bit below the system and we are projecting for the year-end loan growth in nominal terms to grow around 42%, that will be around 39.3% in real time. We are projecting an inflation toward the end of the year of 39%. Regarding deposits, these are going to grow -- are still going to grow above loans growing around 50%. [Indecipherable] real growth in real times now. For 2021, the mix should be inverted. Loans should start to grow above deposits. Loans growing around above the system. And deposits also growing above the system. The inflation we are projecting for 2021 is 50%. So both levels growing above inflation.
Alejandra Aranda -- Itau BBA -- Analyst
Okay, thank you very much.
Ines Lanusse -- Investor Relations Officer
You're welcome.
Operator
[Operator Instructions] The next question is from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez -- HSBC -- Analyst
Hi, good morning. Could you clarify farther the situation with the dividend? You declared an initial dividend which again if I understand correctly, you did not pay, because the Central Bank has not allowed it. Now you have declared in a complementary dividend which again will depend in Central Bank approval and I imagine that they remain parked until the Central Bank tell you it's mine and you can pay for it. Do you have a realistic expectation to pay the dividend this year or this is more likely for next year. And if and when you are allowed, are you planning to do it in pesos or are you going to make in step [Phonetic] of facilitation for foreign shareholders to assess it in dollars? Thank you.
Ines Lanusse -- Investor Relations Officer
Hi, Carlos regarding Central Bank, there is no possibility. It is difficult to say when we will be able to pay. The truth is that by doing this we are increasing our monetary liabilities. We have taken a less inflation. Basically you will see a lower effect on the line of inflation in the P&L. So despite we do not have the approvals to distribute and we don't know when that's going to happen. This should have a positive effect in the P&L, because we are trying to hedge inflation. So basically, that's our main difference.
Carlos Gomez -- HSBC -- Analyst
So when you, let us understand this. It's not completely clear to me. So you declare a dividend. So essentially these then comes out of equity. But its categorization changes from non-monetary liability -- sorry for monetary liability to non-monetary liability?
Ines Lanusse -- Investor Relations Officer
No it comes out from the equity and rolls into the...
Ernesto Ramon Gallardo Jimenez -- Chief Financial and Planning Officer
Liability.
Ines Lanusse -- Investor Relations Officer
Liability, monetary liability.
Ernesto Ramon Gallardo Jimenez -- Chief Financial and Planning Officer
What happens is that you have less monetary assets at the end of the day.
Carlos Gomez -- HSBC -- Analyst
Okay. So you will have less monetary assets, because now this we can say liability as opposed to be impact of the equity.
Ines Lanusse -- Investor Relations Officer
Correct.
Ernesto Ramon Gallardo Jimenez -- Chief Financial and Planning Officer
Exactly. That's the point.
Carlos Gomez -- HSBC -- Analyst
All right. Is there any real life implication, taxes or otherwise. So, because otherwise, it is just simply cosmetic, what happens to inflation adjustment and therefore the reported earnings?
Ines Lanusse -- Investor Relations Officer
I'm not sure I understand your question. But basically, this would give you less inflation adjustment effect, because you have the dividends on the liability side, on the monetary liabilities. That's the main effect. We are trying to hedge against inflation by doing this.
Carlos Gomez -- HSBC -- Analyst
Okay. My other question was, is there any fiscal impact from that tax liability change because you have more or less...
Ernesto Ramon Gallardo Jimenez -- Chief Financial and Planning Officer
The answer to that is, there is no any fiscal impact because in terms of physicality you are going to consider it when you really paid a dividend not when you declare the dividend.
Carlos Gomez -- HSBC -- Analyst
Okay. That is clear. Thank you.
Operator
This concludes the question-and-answer session. At this time, I would like to turn the floor back to Ms. Lanusse for any closing remarks.
Ines Lanusse -- Investor Relations Officer
Thank you, operator, and thank you all for joining us today. We appreciate your interest in us. We look forward to meet more of you over the upcoming 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: 34 minutes
Call participants:
Javier Kelly Grinner -- Investor Relations Manager
Ines Lanusse -- Investor Relations Officer
Ernesto Ramon Gallardo Jimenez -- Chief Financial and Planning Officer
Gabriel da Nobrega -- Citigroup Inc -- Analyst
Alejandra Aranda -- Itau BBA -- Analyst
Carlos Gomez -- HSBC -- Analyst
