Banco BBVA Argentina S.A. (BBAR) Earnings Call Transcript & Summary

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 2023 Financial Year Results Conference Call. We would like to inform you that this event is being recorded. [Operator Instructions]. First of all, let me point out 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 1993 under U.S. Federal Securities Law. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information concerning these factors is contained in BBVA Argentina's annual report on Form 20-F for the fiscal year of 2022 filed with the U.S. Securities and Exchange Commission. Today with us, we have Ms. Carmen Morillo Arroyo, CFO; Ms. Ines Lanusse, IRO; and Ms. Belén Fourcade, Investor Relations. Ms. Fourcade, you may begin your conference .

Good morning, and welcome to BBVA Argentina Third Quarter 2023 Fiscal Year Results Conference Call. Today's webinar will be supported by a slide presentation available on our Investor Relations website on the Financial Information section. Speaking during today's call will be Ines Lanusse, our Investor Relations Officer; and Carmen Morillo Arroyo, our Chief Financial Officer, who will be available for the Q&A session. Please note that starting January 1, 2020, as per Central Bank regulations, we have begun reporting results applying hyperinflation accounting pursuant to IFRS rule IAS 29. For ease of comparability, 2022 and 2023 figures have been restated to reflect the accumulated effect of inflation adjustment for each period through September 30, 2023. Now let me turn the call over to Ines.

Thank you, Belen, and thank you all for joining us today. As we are all aware, Argentina has ended its presidential election process, which started on August 13 with the PASO elections, continued with the general elections on October 22, and ended with a second round of ballotage on November 19, where Javier Milei from Libertad Avanza party, was elected President, changing the current ruling party. The presidential integration ceremony will take place on December 10. The unfavorable macroeconomic conditions have continued to deteriorate, increasing the risk of economic and financial turbulence in the high uncertainty context of the electoral scenario. BBVA Research expects GDP to fall by around 3% this year, 50 basis points less than previously forecasted, mainly due to better-than-expected activity data. For the first month of 2024, strong corrections and increase in inflation is expected. In this context, GDP could contract 4% in 2024, 150 basis points more than what was previously expected. Referring to BBVA Argentina's performance in the first 9 months of 2023, a better operating income was the product of an improvement in interest income due to an increase in the [ position ] and yield of Central Bank instruments and inflation-linked funds. At the same time, the effect of interest rates on loans, mainly leverage on commercial loans, serves the operating income growth. Now moving into business dynamics. As you can see on Slide 3 of the webcast presentation, our service offering has evolved in such a way that by the end of September '23, retail digital client penetration reached 61%, while retail mobile clients reached 56%. The response on the side of customers has been satisfactory, and we are convinced this is the path to pursue in the aim of sustaining and expanding our competitive position in the financial system. Retail digital sales measured in units reached 93.8% in the third quarter of 2023. And represents 72.7% of the bank total sales measured in monetary value. New customers acquisition to digital channels reached 66% (sic) [ 76% ] in the third quarter of 2023 from 72% in the third quarter of 2022. The bank actively monitors its business, financial conditions and operating results, in the aim of keeping a competitive decision to face contextual challenges. Moving to Slide 4. I will now comment on the bank's third quarter 2023 financial results. BBVA Argentina's third quarter 2023 net income was ARS 9.9 billion, decreasing 75.9% quarter-over-quarter. This implied a quarterly ROE of 5.1% and a quarterly ROA of 0.9%. The operating income in the third quarter of 2023 was ARS 167.3 billion, decreasing 1% from the ARS 169 billion recorded in the second quarter of 2023. Quarterly operating results are mainly explained by, one, better interest income results through public securities and liquidity instruments; and two, an improvement in loan loss allowances. These effects were negatively offset by, one, lower net fee income; and two, higher administrative expenses. It is worth noting a higher income from write-down of assets at amortized cost and at fair value to other comprehensive income of ARS 4 billion, mainly due to the sale of corporate bonds. In the quarter, there is a positive effect in the income tax line, considering the final judgment dictated by the Supreme Court concerning Fiscal years 2014 and 2013. Applying the accounting information framework established by the Central Bank, the bank has recorded a positive result of ARS 7.4 billion as of September 30, 2023. Net income for the period was highly impacted by income from net monetary position and inflation increased from 23.8% in the second quarter of 2023 to 34.8% in the third quarter of 2023. Turning into the P&L lines in Slide 5 and 6 Net interest income for the third quarter of 2023 was ARS 270.2 billion, increasing 8.1% quarter-over-quarter. In the third quarter of 2023, interest income, in monetary terms, increased more than interest expenses, mainly due to, one, adding premium from REPOs; two, a higher position and yields of public securities, in particular, of LELIQ; and three, the positive effect of income from loans, especially from discounted instruments, mainly due to productive investment credit lines for SMEs. This was offset by the negative effect of interest expenses from checking accounts and time deposits. In the third quarter of 2023, interest income totaled ARS 586.9 billion, increasing 17.3% compared to the second quarter of 2023. This is partially due to the higher average position in LELIQ, added to a gradual increase in the monetary policy rate from 97% at the beginning of the quarter, up to 118% at quarter end. Interest expenses totaled ARS 316.6 billion, denoting a 26.5% increase quarter-over-quarter. Quarterly increase is described by higher checking accounts, in particular, interest-bearing checking accounts and time deposit expenses. Interest from time deposits, including investment accounts, explains 70.5% of interest expenses versus 77.7% the previous quarter. Net fee income as of the third quarter of 2023 totaled ARS 17.6 billion, decreasing 44.9% quarter-over-quarter. In the third quarter of 2023, fee income totaled ARS 39.5 billion, falling 12.1%. The quarterly decrease is mainly explained by a 21% fall in fees from credit cards considering that this line includes [ Puntos BBVA ] royalty program. And that there was a greater use of this program. Additionally, an increase in prices was implemented during September, not getting to offset the negative effect of inflation, and denoting a 5.1% fall in fees income linked to liabilities. Regarding fee expenses, these totaled ARS 22 billion, increasing 68.9% quarter-over-quarter. Greater expenses are explained by fees paid in foreign exchange transactions related to royalty affected by the devaluation of the local currency, and client acquisition costs will translate into a 4% increase in active clients in the third quarter of 2023. In the third quarter of 2023, loan loss allowances decreased 48.4% due to the release of provisions related to credit cards [ derivate ] from the stability in the NPL ratio of the retail portfolio. During the third quarter of 2023, total operating expenses were ARS 137.2 billion increasing 9.7% quarter-over-quarter, of which 31% were personnel benefits costs. Personnel benefits increased 8.5% quarter-over-quarter. The quarterly increase is mainly explained by the projected inflation adjustment of vacation stock provisions and variable compensation. This adjustment is applied retroactively. Quarterly increases were also affected by the 32% collective agreement increase on wages, which implied a 97% accumulative increase as of the third quarter of 2023. As of the third quarter of 2023, administrative expenses increased 12.7% quarter-over-quarter. The quarterly increase is mainly explained by, one, outsourced administrative expenses; two, greater rent expenses; three, taxes; and four, an increase in software services. All of these were related to an increase in the amount of services contracted and an increase in expenses of service contracted with the parent company. Being this said, the quarterly efficiency ratio as of the third quarter of 2023 was 82.4%, increasing compared to the 52% reported in the second quarter of 2023. The quarterly increase is explained by a higher increase in expenses than income, which considers the negative effect of inflation. The accumulated efficiency ratio as of the third quarter of 2023 reached 63.8%, compared to the 56.6% reported in the second quarter of 2023 and improving versus the 69% reported in the third quarter of 2022. In terms of activity on Slide 7, private sector loans as of the third quarter of 2023 totaled ARS 1.4 trillion, decreasing, 4.8% and 0.1% year-over-year. Loans to the private sector in pesos fell 5.3% in the third quarter of 2023. During the quarter, the decrease was especially driven by a 9.4% decline in credit cards followed by an 11.7% fall in consumer loans and a 7.5% fall in other loans, which includes commercial loans related to productive investment credit lines for SME. The fall was partially offset by a 7.6% increase in discounted instruments, driven by the new productive investment credit line quotas. Loans to the private sector denominated in foreign currency increased 2.6%. Quarterly increase is mainly explained by a 4% growth in financing and prefinancing of exports, and a 9.4% growth in credit cards. Loans to the private sector in foreign currency measured in U.S. dollars increased 1.5% quarter-over-quarter. During the quarter, the retail portfolio fell 9.9% and the commercial portfolio increased 1.5%. As observed in previous quarters, loan portfolios were impacted by the effect of inflation during the third quarter of 2023, which reached 34.8%. In nominal terms, BBVA Argentina managed to increase the retail commercial and total loan portfolio by 21.5%, 36.8% and 28%, respectively, during the quarter, only surpassing quarterly inflation levels in the case of commercial loans. BBVA Argentina's consolidated market share of private sector loans reached 9.35% as of the third quarter of 2023, improving from the 8.47% a year ago. In the third quarter of 2023, asset quality ratio was 1.42% compared to the 1.38% recorded in the second quarter of 2023. The increase is mainly explained by a slight increase in the commercial nonperforming portfolio, linked to an increment in the foreign currency exchange rates. On the funding side, as seen on Slide 8, private nonfinancial sector deposits in the third quarter of 2023 totaled ARS 2.6 trillion, decreasing 5.5% (sic) [ 4.5% ] quarter-over-quarter. The bank's consolidated market share of private deposits reached 7.13% as of the third quarter 2023. Private nonfinancial sector deposits decreased 5.7% compared to the second quarter of 2022. The quarterly change is mainly affected by a 17.9% decline in time deposits and a 22.3% fall in saving accounts, partially offset by a 23.9% increase in checking accounts, especially interest-bearing checking accounts. Private nonfinancial sector deposits in foreign currency expressed in pesos increased 1% quarter-over-quarter. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators in the third quarter of 2023. Capital ratio reached 27.1%. The decline in the ratio was mainly driven by the impact of devaluation of the foreign exchange rate on risk-weighted assets, combined with a nominal increment of loans. Exposure to the public sector in the third quarter of 2023, excluding Central Bank instruments, represents 12.7% of total assets, above the 11% in the second quarter of 2023 and below the 16.8% reported by the system as of August 2023. It is worth mentioning that as of the date of this report, BBVA Argentina has distributed the 6 installments scheduled on dividend payments from the ARS 50.4 billion total to be paid according to the plan published on June 7, 2023, and based on the terms agreed with the Central Bank. The bank's total liquidity ratio remained healthy at 76.6% of total deposits as of September 30, 2023. This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

[Operator Instructions] And our first question will come from Carlos Gomez of HSBC.

Thank you for the results and for the presentation prepared for this call. The first obvious question I have and I need not quite understand is the impact of inflation in your quarter. We understand it has been higher. But when we compare to the other published results, it is particularly large as reported by you. We know it is complicated while there are many moving pieces that come into that. But perhaps give us an understanding as to why it is higher for you? And whether it is sustainable, whether in the coming quarters, we should expect you to be more affected by inflation if it continues to go up? This refers to your loan portfolio, which was flat in inflation adjusted terms. But actually, that means that you are increasing market share quite considerably from 8.5% to 9.4% as you publish here. Is that really the strategy on the part of the bank, something that you are trying to do? You're trying to be perhaps a bit more aggressive than the others or just a result of how the quarter came out? And finally, I saw a 44% increase in checking accounts. Is there any particular special reason for them to increase so much?

Carlos, it's nice to talk to you again. Okay. Let me go through the first question. As you mentioned, yes, we had more inflation quite higher in the third quarter compared to the second quarter. We are talking about levels of 35% compared to 24% in the second quarter. Our year-to-date accumulated inflation of 103% as of the third quarter. Probably the -- this comparative effect compared to the other banks that has already reported has to do with the picture as of the third quarter of 2023 that we have less of our equity protected of inflation. If you see our report, you can see that we have started to have a position of dual bonds that are tied both to exchange rate or inflation adjustment at the end of September. We didn't see that effect that clear in the third quarter. But going forward, as of the fourth quarter of this year, our protection of the equity is around 100% more or less if we combine [ share ] bonds, dual bonds and real estate. So that could be reverted as of the fourth quarter of this year. Also, yes, we had the inflation also affecting our costs and that also is reflected in our results. So yes, it was a tough quarter, but we believe that can be reverted in the fourth quarter. The second question, I heard about the market share, but could you repeat the second part of the question?

So -- I mean when I look at your [indiscernible] from, I think, the [ private], [indiscernible] market share in private loans went from 8.5% to 9.4%. That's a significant change. The reserves of the banks are shrinking. You are not. So again, I wondered if it was just a coincidence of how the quarter ended or a conscious policy to expand more than the others when some of the players are retracting or leaving the market?

Okay, yes. Actually, that is a key driver of our strategy. While you can see that our commissions probably fell compared also to the other player, and that has to do with the intent of increasing franchise in the country. We are sustainably growing our market share since year-over-year, as you mentioned, both in loans and deposits. And we are investing both to -- in market share. If you go product by product, we are being very aggressive in personal loans. We are gaining a lot of market share there. But again, the strategy of the bank is to gain franchise and gain market share. And that is our driver towards the year end of 2023 and again, also for 2024. Our driver is to grow more than the system. Not despite that probably inflation, sometimes doesn't -- the growth doesn't end being in real terms, but our aim is to gain market share. Did that answer your question? Okay. So that was the second question. And the third question you were asking about checking account, correct, the increase?

Correct.

Okay. That has to do that. You have to say -- you have to see the balance sheet that in the way the Central Bank asks you to present information in checking accounts, we also have those checking accounts that are remunerated that have a cost. And that as of the third quarter, we were increasing our wholesales deposits to play sales deposit opportunistically in LELIQ and Central Bank instruments. So that's why that line is -- the site deposit, particularly checking account is increasing. As of the fourth quarter, that will start to shrink since we are starting to reduce balance sheet by reducing those type of wholesale deposits.

Could you let us know the size of the non-remunerated checking accounts?

I don't have the figures. I can send you the figures later. The specific figures, we don't disclose that in the press release.

Roughly. I mean [ you have ARS 700 billion ], I think in total. So are we talking about ARS 300 billion non-remunerated to ARS 400 billion?

I can check that information for you and send it if that's okay. I don't have it in front of me. But it's an important number, the amount of checking accounts that, let me check -- let me -- if it's okay with you, I can find information and send it back to you if that's okay. More -- let me check to have some information like more or less. The non-remunerated checking account, it's around ARS 376 billion and the remunerated around ARS 260 million. But let me check those figures and send it back to you, if that's okay.

The next question comes from Josephine Jimenez of Channing Global.

We're curious how might dollarization affect the bank's financial results. It would be very helpful if you give us some guidance about that. According to -- at least from what we can glean your net monetary assets at the end of 2Q, amounted to approximately ARS 1 trillion, but that net monetary position led to a loss from income from net monetary position of ARS 48 billion in 3Q. So if dollarization is placed into effect, how -- what might we expect should this type of loss from net monetary position be a raise when dollarization is in place, because there will be no more indexation? We would appreciate your comments on this, please.

Hello. Nice to hear from you back again. Okay. Regarding dollarization, as you know, Milei just was elected last Sunday. Honestly, we're not seeing dollarization as a possibility, nor this year, nor the following year. And there is still a lot of information to be disclosed when the president assumes and we will see what he can do or what he can't do. So we're not seeing dollarization as a possibility. Being that said, as I mentioned before, the way in which we protect our equity to reduce the effect of inflation is by 2 factors: the real estate, that protects our equity; and the share bonds and the dual bonds that have increased our protection of equity to around 100% of the equity as of the fourth quarter of this year. So that's the way we have all the financial system to protect the equity of the bank. But again, dollarization, it's not something that we see as a possibility in 2024.

And if I may have a follow-up question. Could you share with us the bank's outlook for inflation here on without, let's say, if dollarization impact does not occur in 2024, what sort of inflation [indiscernible].

Yes. The figures that our research department is seeing today. You know that Argentina changes practically every day. But we are projecting our year-end inflation around 200% for 2023. And for 2024, around 155%, sorry. Being this said, you have to think that what our research department is seeing is that in the first month of 2024, probably we're going to have a much higher inflation. So the average inflation should be higher than 2023. During the whole 2024. But year-end, it should be less. It will be 155% compared to 200% year-end of 2023. The other variable that our research department is projecting is the monetary policy rate that it is projecting to end 2023 around 144%, a little bit higher than the 133% that we have today, and moving towards the year end of 2024 at around 56%. So it's negative in real terms what we're seeing for next year.

Could you repeat that last point, you lost me on this negative.

The monetary policy rate that we are projecting is to end 2023 around 144%, which is a little bit higher than the 133% that we have today and ending 2024, with 56%. This decrease, you should see it more towards the end of the first quarter, beginning of the second when the harvest takes place. And that will represent a negative interest rate in real terms.

So how would that affect then your financial results? That would be a significant level of negative rates, right, in '24?

We are -- despite this, we're still projecting. Yes, you could see a decrease in ROEs and ROAs for 2024, but positive in real term. With inflation that goes from 200% to 155%, but in average in 2024 it's going to be higher than the 200%. We are still seeing positive ROEs and ROAs, lower, but positive.

[Operator Instructions] This will conclude the question-and-answer section. At this time, I would like to turn the floor back to Ms. Lanusse for any closing remarks.

Okay. Thank you for your time and let us know if you have further questions. Have a good day.

Thank you. That concludes today's presentation. You may disconnect your line at this time, and have a nice day.