BBAR Q4 2020 Earnings Call
Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's Fourth Quarter 2020 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 the Company's presentation. After company remarks are completed, there will be a question and answer section. At that time further instructions will be given. [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 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 the BBVA Argentina's annual report on Form 20-F for the fiscal year 2019 filed with the U.S. 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: Hello everyone, and welcome to the BBVA Argentina earnings conference call for the discussion of our quarter and fiscal year ended December 31, 2020. 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 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 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 regulation, we have begun reporting results applying hyperinflation accounting in accordance with IFRS Rule IAS 29. For ease of comparability, figures for all quarters of 2019 have been restated applying IAS 29 to reflect the accumulated effect of the inflation adjustment for each period through December 31, 2020. Now, let me turn the call over to Ines.
Ines Lanusse: Thank you, Javier, and thank all of you for joining us on our fourth quarter 2020 and full year earnings conference call. We hope you and your beloved ones are healthy and safe on these challenging times. BBVA Argentina, has been able to maintain a solid position within a high uncertainty concept throughout 2020. While some signs of recovery have appeared on economic side, much still remains to be defined facing 2021, such as the development of the global sanitary crisis, the resolution of internal objects related to fiscal deficit financing, the agreement with the IMF, and last but not least, the result of 2021 mid-term elections. Meanwhile, the bank closely monitors its business, financial conditions and operating results in the aim of anticipate anticipating possible effects of the gradual removal of regulations implemented by the government during the pandemic, and especially over asset quality and profitability ratios. It is important to emphasize that the global sanitary crisis in 2020 confirmed that of which BBVA Argentina was convinced some years ago, the significance of technology in the delivery of financial services. In virtue of our vision of the future, we were able to rapidly adapt to the new normality and continue to offer our services to all our clients during the pandemic. These unexpected circumstances ratifies that the path we have taken in terms of digital transformation, internal process adaptation and personnel training is most adequate. Regarding digital transformation, total digital clients reached 1.9 million with a penetration of 72% from 66% a year ago. Total mobile clients reached 1.6 million, with a penetration of 60% from 54% in the prior year. Moreover, digital branches have been launched as of October 2020, combining several features between human capital and structure facilities to promote clients self-service aiming to digitalize and migrate clients to remote channel. During December 2020, we launched MODO. MODO is the first payment solution app to be launched in a strategic alliance with other Argentine bank. MODO enables wire transfers and cashless payments to mobile phones, and includes all member banks' promotions available at purchase. MODO has already reached 1 million users and keep growing. In terms of responsible banking, during 2020, BBVA's purpose to bring the age of opportunity to everyone became even more relevant. In line with a commitment to sustainable development and a similar role as the leading financial institution in this area, we launched a new line of eco-personal loan and a line of "green-loan" cooperation. In addition, we were the first time to deliver sustainable cards make with recyclable materials. BBVA Argentina keeps working towards its sustainability model supporting responsible business actions regarding inclusion, financial education and environmental protection as part of his compromise with the country. I will now comment on the Bank's fourth quarter 2020 and full year financial results. All figures mentioned hereinafter are measured in current currency at the end of the reporting period, including the corresponding financial figures for previous periods provided for comparative purposes, unless otherwise noted. It is also important to mention, that on February 9, 2021 to Communication A 7220, the Central Bank informed that it admitted the retroactive application of qualification and exposure of monitor results exposed in Communication A 7211 for the December 31, 2020 financial statements. Then later explained that the monetary result accrued a monetary concepts at fair value through other Comprehensive Income, OCI, should be recorded as the corresponding accounts in the income statement of the period, thus retained earnings from previous periods should be adjusted to include monitor results that were accumulated in OCI at the date of application. It is important to mention that this measure was optional for implement as of December 2020, but through Communications A 7211 it will be compulsory for all banks as of January 2021. These changes have been applied to the accumulated financial statements as of December 20 pursuant to the regulation, reason for which quarters have not been restated for the income statement in these earnings release, but will be restated during 2021. BBVA Argentina full year 2020 net income, including inflation adjustment effects total 12 billion pesos, 38.9% lower than the 19.7 billion pesos posted a year ago. The year-over-year decrease is mainly explained by impact of the pandemic, by the sharp contraction of the interest rate as a consequence of the monetary policy implemented by the Central Bank and by the strong restrictions to the FX market. Another factor that was also impacted in the results of 2020 is a partial collection and exchange of LELINK, which has been restructured in August 28 2019. On the expense side, we were able to generate savings in operating expenses as a consequence of a better efficiency management. It's important to mention that in the fourth quarter 2020, a new provision for 2.1 million pesos was recorded. This decision goes in line with a continuity of the digital transformation process that the bank have decided to launch previously, which aims to generate higher efficiency and agility in decision making process. We also experienced savings of the commission side. Product of lower expenses in customer acquisition during 2020. During the year, the bank presented a positive real return on equity of 11.8% and real return on assets of 1.8% proving the bank's precepts [ph]. In the quarter, net interest income total 19.5 billion pesos, 5.3% higher than the results posted in the third quarter of 2020, and 17.9 billion lower than the results posted a year ago. In the quarter, interest income growth does not compensate for the greater increase in interest expenses, explained by the regulation of both active and passive rates, and the lower interest income generated by credit card financing mainly through the National Ahora Program. During the fourth quarter of 2020, interest income totaled 32 billion pesos, 10.2% higher quarter-over-quarter and 12.4% lower year-over-year. This quarter-over-quarter performance can be explained by the 266.4% increase in the other interest income line due to the higher income from active REPOs as a consequence of increase in REPO rate. Interest income was also benefited by higher income from CER/UVA adjustments, mainly explained by the acceleration of the inflation during the quarter. Income from government securities fell 3.6% sequentially, and 3.5% year-over-year comparison. This quarter-over-quarter decrease is explained by both a lower volume invested in LELIQ and a lower average rate in these instruments [ph]. Interest income from loans and other financing totaled 15.6 billion pesos, decreasing 5.1% quarter-over-quarter. It is explained by the contraction in overdraft a direct consequence of the economic situation and credit cards affected by the Ahora program. These combined drop was partially offset by the increase in documents sent to higher seasonal activity towards the end of the year and higher average rates. In the fourth quarter 2020, interest from time deposit represented 78.9% of the bank's total interest expense, increasing 8.4% in the quarter. Net fee income amounted to 2.8 billion pesos, 16.6% lower quarter-over-quarter. This contraction is explained by an increase in the expenses as a consequence of a more aggressive approach towards clients in the recession, which was not offset by the quarterly increase in fee income led by the increasing activity in the credit card fee. Moving on to expenses. During the fourth quarter of 2020, personnel and administrative expenses totaled 9.7 billion pesos, decreasing both in the quarter and the yearly comparison 2.6% and 13% respectively. Personal benefits contracted 4.8% in the quarter reaching 4.9 billion pesos. The savings is partially explained by the smaller structure and a higher quarterly and annual inflation that surpass the salary increase as stipulated with the labor unions during the year. Administrative expenses remained almost unchanged, falling 0.3% in the quarter of savings generated in other administrative expenses that offset the seasonal increase in armored transportations transportation service. For 2020, the accumulated efficiency ratio was 56.8% above the 43.7% reported a year ago, the increase is explained by a higher percentage increase of the income line which is not offset the savings generated in the expense line. Excluding the inflation adjustments included in the line, income from the monetary position, the accumulated efficiency ratio as of 2020, which have reached 45.1%. In terms of activity, the bank financing to the private sector totaled 290.3 billion pesos, increasing 0.8% quarter-over-quarter and 5.9% year-over-year. BBVA Argentina consolidated market share over the private sector loans as of December 2020, reached 8.49% from 7.71% in support quarter of 2019. Loans to the private sector in case of increased 1.6% in increase 0.6% in the year. Dollar-denominated loans decreased 5.3% quarter-over-quarter measured in pesos and 14.3% measured in dollars, mainly driven by the contraction in demand of loans in foreign cards. Regarding the retail portfolio, including mortgages, pledge, consumer and credit card loans, these have increased 7.3% quarter-over-quarter and 6.1% year-over-year. In the quarter, the greatest increases are reflected in pledge loans and credit card loans, but later boosted by Ahora programs and greater season. Commercial loans including overdrafts, discounted instrument, lease in foreign trade and other loans of 7.3% quarter-over-quarter and grew 5.5% year-over-year. The quarterly decrease is mainly explained by a 20.8% decline in overdrafts and a 15.5% decline in the loans for prefinancing and financing experts. These was partially offset by a 4.9% increase in discount instruments as a consequence of higher commercial activity. The fourth quarter of 2020, gross loan to deposit ratio was 61% compared to 70% a year ago. As of December 2020, asset quality measured as a total non performing portfolio over total portfolio reached 1.42%, 25 basis points higher than the previous quarter. The quarterly increase is mainly explained by an increase in the commercial non-performing portfolio. This ratio is still positively affected by the temporary flexibility in central bank regulations regarding depth or classification during the COVID pandemic, which extended grace period in 60 days before our loan is classified as non performing and suspend the mandatory reclassification of clients that have been an irregular performance with other institutions, but our regular performance within the bank. These waivers are in effect until March 31, 2021. The coverage ratio allowance over total non-performing portfolio decrease to 334.43% in the fourth quarter of 2020 from 355.26% n the previous quarter. This is explained by an increase in non-performing loans which is greater than the increase in allowances as a consequence of the implementation of impairment models and the continuity effect of waivers enforced Central Bank regulations regarding debt classification. Cost of risk, loans, loan loss and over average total loans reached 4.85%, higher than the 4.61% recorded in the third quarter of 2020. This is mainly explained by an increase in non-performing Commercial performance. Allowances for the bank in the fourth quarter, 2020 reflect expected losses driven by the adoption of the IFRS 9 standards as of January 1st, 2020, excluding debt instruments issued by the non-financial government sector, which were locally temporarily excluded from the scope of such standards. In the fourth quarter, exposure to the public sector, excluding central bank instruments, measured as a percentage of total assets, reached 5.6% above the 4.3% recorded in the previous quarter. Our total exposure to the public sector excluding central bank note was 38.3 billion pesos above the 28 billion pesos in the previous quarter. On the funding side, private sector deposits as of the fourth quarter of 2020 totaled 472 billion pesos growing 7.8% quarter-over-quarter and 19.1% when compared with the fourth quarter of 2019. Private Sector deposits to local currency were 337 billion pesos, increasing 8.2% quarter-over-quarter and 41.2% year-over-year. It is mainly explained by the growth of investment accounts, checking accounts and to lesser extent, by the growth in saving account. Private sector deposits in foreign currency measured in pesos grew 6.7% in the quarter and contracted 14.3% when measured in dollars. As of December 2020, BBVA's transactional deposits including checking and saving accounts represented 66.6% of total deposits from 63.1% a quarter ago. BBVA Argentina consolidated market share on private sector deposits as of December 2020 reached 7.13%. In terms of capitalization BBVA, Argentina continues to show strong solvency indicators, accounting and excess capital of 57.1 billion pesos, entailing the total regulatory capital ratio of 20.2% and Tier 1 ratio of 19.6%. The Bank's aim is to make the best use of this excess capital. The bank's liquidity ratio in pesos and dollars remain healthy at 60.6% and 85.1% of total deposits as of December 31st, respectively. This concludes our prepared remarks. We will now take your question. Operator, please open the lines for questions.
Operator: We will now begin the question and answer session. [Operator Instructions]. Our first question is from Gabriel Nobrega with Citi. Please go ahead.
Gabriel Nobrega: Hi, everyone. Good morning and thank you for jumping to the tough questions. One thing that caught my eye during this quarter was the rapid deterioration in your commercial loan book. And I think this is a bit surprising as the Central Bank has actually extended some of the flexibilization into the end of March. And so first, I was just wondering, is there a specific sector? Or was it related to a specific company? And if it was really related to a specific company, how are you provision for them? And I'll make a second question afterwards. Thank you.
Ines Lanusse: Hello, Gabriel. How are you? Yes, the increase in NPL, in states in a particular case a company from the oil and gas sector, San Antonio, the debt were for 1.5 [ph] billion pesos from that 4.3 is dollar-denominated. And the company has been already provisioned into Stage 3. So that's the particular case. Just to give you some other information regarding NPL, we believe the ratio is very well under control. The asset number we have for NPL excluding Central Bank waivers as of December is 1.82. So it's very well under control. And we are projecting. I'm sure that, Javier [ph], you would like to add. We are projecting NPL towards the end of 2021, around 3.32% mainly driven by commercial lending and the removal of the waivers imposed by the Central Bank.
Gabriel Nobrega: Alright. Perfect. Thank you for the explanation. And then my second question, when we look at the provisions, even though your billing reports before fourth quarter, we see that -- it seems that provisions increased a lot. And so, I was just wondering if the increase in provision is it because of this company, which you went classified as on Stage 3? And also, as Ines just said, that you're expecting NPL to pick up and then reach around maybe 3.3% by the end of the year. Are you seeing any need from further provision throughout the year? Thank you.
Ines Lanusse: Okay. Just to be clear, in the press release, the only thing that we didn't disclose was the full P&L for the quarter. But there's a chart on provisioning by quarter. So you can see that information. Its available in the press release. Regarding the increasing provision, it is mainly to do with the change in the calculation of the parameters of IFRS 9, which is normally done at the end of the year. Particularly it was a November. Going forward to give you more color on asset quality, the cover ratio as you know, reached 324%, and we are seeing that ratio towards the end of the year moving towards 150. Mainly because of an increase on the denominator of the NPL. So that's our projection. And regarding cost of risk, we ended the quarter or the year in 4.89%. And we are projecting that ratio to go further down to 3.4%, mainly because a higher increase in the average loan book compared with the loans allowances. That as of December, you had a higher increase in the numerator rather than that denominator, so it's going to be invert the increases.
Gabriel Nobrega: Alright. Thank you very much for your answer, Ines.
Ines Lanusse: You're welcome, Gabriel.
Operator: [Operator Instructions] The next question comes from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez: Hello, good morning, Ines. If we can move back, so why exactly you're not closing the P&L, because it's a pretty extreme measures. And I think, I completely understood what is the reason. Now I understand that you intend to publish full quarterly information in the coming quarters? Could you confirm that? And will you be providing history? And second, regarding your expectations for this coming year in terms of growth, in terms of profitability. I know it's very hard. And I know there are so many variables that -- what is the general idea of what the bank expects relative to 2020? Thank you.
Ines Lanusse: Hi, Carlos. Thank you for your question. Okay. So basically, we did not disclose the P&L by quarter, because there was an implementation of our norm Communication A 7222 of Central Bank. That basically was changing the way you were recognizing the effects of inflation on all the bonds you have and how to collect themselves. As you know, we had the bonds in other comprehensive income. And before the change in this regulation [ph], you were just accumulating the effects of inflation since you acquire the bond. And you were only moving that negative effects into the P&L once you sold or defaulted the bond. That norm -- that regulation changed. And it was not compulsory for all banks in December that those central banks allowed it to make the changes in December, the change that we did in our P&L and it is compulsory for all banks as of January 2021. So as of January, or as of the first quarter of next year, you're not going to have this differences between the way our bank reports the information. So basically what you did now is the accumulated effect you had of the inflation for that particular bond, you had to distribute it in the corresponding period. You recognize some part of that loss in 2020, and another part in 2019. So basically, you increased -- you had an extra increase of your net income, for example, the variation because of the implementation of this regulation was 5.4 billion pesos more in 2020, but 9.2 billion pesos less in 2019. If we have shown the fourth quarter 2020 information, it wouldn't have been comparable with the third quarter or the other quarters, because you were not obliged to restate the previous quarter. Going forward, as the quarters are presented for historical quarters will be restated with the application of this new recommendation, and it's going to be aligned with all of the banks. You will not have more distortions when comparing with the other banks you cover. I hope I answered that question. I know it has been a complicated and it has been a complicated decision for us. But it was not accurate to show a fourth quarter with a full effect, but actually you can do that calculation, if you want. You just need to take the third quarter information you have to multiplied by the inflation of the quarter, which was 1.11%. And you subtract that with accumulated results and you can get our fourth quarter with full effect of the implementation of regulation. Going towards…
Carlos Gomez: Okay. Before you move on. Obviously, this is complex, obviously, this requires a lot of calculations. So, could you please and could management, please commit to providing us with that quarterly information in the future? And you mentioned that it affects the 2019 results as well. So could we have 2019, 2020, both in nominal and in real terms so that we can make comparisons because at this point we have quite lost?
Ines Lanusse: In nominal terms is impossible, Carlos, and none of the other banks have presented nominal information. The balance sheets, presented adjusted by inflation. And all the figures we're providing are adjusting for inflation. And clearly, the projections we're seeing for loan deposits numbers I'm going to give you are adjusted by inflation as well, because that's a local regulation. What we are going to do is to provide the quarter information with implementation of the norm and corresponding comparative. Okay?
Carlos Gomez: Okay. Thank you. And [Indiscernible].
Ines Lanusse: Okay. So going forward projections. Carlos, again, this is all projections are real terms. We ended the fiscal year 2020 with the loan book growing around 6%, growing above the system. We're expecting for 2021, an increase of around 11% in real terms, growing above the system as well. Our research department is seeing a contraction in loan for 2021 in the system. That growth is going to be led by U.S. dollar lows, because the agribusiness [ph] should pick up. And on a better lesser extend by the debatable. On total deposits, we ended the year growing around 19.5%, that were flat compared to the system. And for 2021, we are expecting 10% growth. Again, growing above the system, and our research department is seeing also a contraction in deposit growth for the system in 2021. The currency and then it's going to be led by the book in dollars, more than the peso. Regarding ROE and our ROA, as you mentioned is difficult to predict and change rules and regulations change very rapidly. But we are seeing a decrease in ROE and the ROA to half. And that's mainly has to do with the inflation. We're expecting inflation to go up to 50% in 2021 compared to a 36% you saw in 2020. So it's basically an effect of the inflation. The P&L should -- always in real terms now should behave very similar to what was 2020, but the decrease will mainly come from a higher inflation assets in the net monetary position.
Carlos Gomez: Okay. So similar nominal returns, so to speak, but lower real returns because of inflation?
Ines Lanusse: Alright.
Carlos Gomez: Thank you very much.
Ines Lanusse: You're welcome.
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: Thank you for your time. Hope you have a nice day. And please let us know if you have further questions. We will happy to answer. Bye.
Operator: Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.