Banco Bilbao Vizcaya Argentaria Colombia S.A. (BBVACOL.CL) Earnings Call Transcript & Summary

Good morning to our investors connected all around the world. You are welcome to our second quarter 2021 results event. My name is Diana Alejandra Zuluaga, and I am part of the Legal Department of BBVA Colombia. In this event are also connected Alejandro Reyes, Principal Economist; and Juan Pablo Herrera, ALM Director, who will give the presentation. The corresponding documents were sent to you through email both in English and Spanish and will be available in our website in the section Investor Relations of the link Agenda. We remind you that if you want to ask a question, you can use the chat or you can use the raise your hand button that can be found in the bottom right section of the screen. Without further ado, I give the turn to Juan Pablo. Thank you.

Thank you, Diana. Good morning, and welcome to all of our investors and shareholders connected to this call, in which I will present the results for the second quarter of 2021 for BBVA Colombia. I will start with a brief overview of the macroeconomic scenario. And later, I will be explaining the highlights of our results for the quarter. First, I will we will start with our microeconomic outlook on Slide #5. The global economy is recovering faster than expected in most of the economies, especially in G3 countries. Vaccination, fiscal monetary stimulus and economic reopening are the key determining factors in this process. This recovery rhythm has further disrupted some production chains, increasing commodity prices and creating inflation-related pressures, reaching inflation rates at 5.4% in the United States in June 2021. It is expected that the economic policies will remain focused on supporting economic growth with an expensive discount policy and monetary policy that will gradually remove stimuli to control the inflationary pressures. Additionally, according to BBVA research, the world's GDP will reach growth to 6.3% in 2021 and 4.7% in 2022. In this sense, factors such as the withdrawal of monetary stimuli by the United States Federal Reserve, greater persistence of inflation or even the new coronavirus variant, keep the uncertainty levels at sectionally high loans and pose a risk to the expected economic recovery scenario. In Colombia's case, the economic recovery after the pandemic has been consolidated in the first half of the year. Particularly, we observed an enhanced performance of the consumer and investment also a better external demand, which pull up the economy. The third pandemic wave had limited effects on private consumption despite the context of projects related to the tax reporting May. BBVA research estimates that this year's growth will reach 7.5% and will moderate 3% to 4% in 2022. With these estimates, GDP and private consumption will return to their prepandemic levels in the third quarter of 2021, while fixed investment will equal the prepandemic levels in mid-2020 to '22 with a more accelerated behavior of machinery and equipment. Exports and imports will do so in the first half of 2022. Continuing with Slide #6. The second quarter inflation surprised to the upside in part due to the shortage of some perks products caused by blockades and protest, factors that should mostly be transitory, but also due to the rise in raw material prices, product cost, statistical base effects and soft bottlenecks in certain sectors. BBVA Research inflation to remain relatively stable for the rest of the year, closing 2021 at 4.35%. Due to global factors are really passed through all the exchange rate, depreciation of some bottlenecks in the specific sectors, the risk balance is biased up by 2022 risk penetration to close at 3.5% lower than in 2021 due to, among other factors, that withdraw of the VAT company in the tax reform. This situation could lead the sector bank to anticipate the interest -- the increases in interest rates. BBVA Research expect the policy interest rate to increase in the third quarter of 2021, starting the Board cycle with 2 increases of 25 basis points in 2021 and 4 increases of 25 basis points in 2022. In Slide #8, I would like to share the detailed transformation results that BBVA is leading. We continue evolving in our digital capabilities that is why to strengthen our clients' security. BBVA Colombia launch the new dynamic security code, CVV, in the BBVA mobile application. This new feature reduces the risk of digital fraud and threat, granting more secure transactions. This feature is already available for the 4 million active debit cards and the 800,000 credit cards for the entity. Each code lasts for 5 minutes and will only be known to the user through the application becoming the safest medium for e-commerce. In the second quarter 2021, we had more than 1.5 billion digital customers. In this way, we can see that as of June of 2021, mobile customers grew 6% compared to the same period of the previous year and represent more than 1.4 million. Additionally, BBVA Colombia clients increase the use of digital channels by 87% in the second quarter of the year. In this way, BBVA followed the path to consolidate itself as a digital bank that promotes closeness to its customers by offering them innovative solutions with high added value following their needs, improving their experience to continue strengthening the last results. In Slide #8, to help our clients toward the decision to a green and healthier future, through financial solutions, that is the impact of climate change by promoting responsible use of resources and alternative technologies with clear negative effects on the environment. BBVA Colombia has a more sustainable operation for COP 1 trillion for this year. In these terms, more than COP 860 billion, including loans, were allocated to companies linked to compliant with environmental indicators, issuance of sustainable guarantees, social computable lines and other financial solutions of this type. Additionally, the bank has allocated more than COP 25 billion for home purchase loans and real estate projects with sustainable certification of more than COP 50 billion in loans for the purchase of hybrid or electric vehicles. Moreover, BBVA Colombia had the Aviatur Group signed a financing agreement for a long-term loan at KPI-linked format for COP 70 billion, the interest rate of which is determined by meeting the company's sustainability objectives. Comparing with this call will be refined by an external consultant, which offers greater transparency for both parties. This operation became the first of its kind in Colombia's national tourist sector to promote economic reactivation and the adoption of sustainable practices in the tourism sector. BBVA Colombia is committed. We're working in all possible spaces so that in alliance with the public sector, suppliers, the social sector, the private sector, sustainable development can accelerate its way to our greener future. Equally, the bank managed it to be carbon neutral, thanks to the reduction of CO2 and the compensation of more than 3,200 tonnes of CO2 in 2020. I would like now to share the great highlights of our results in the second quarter of 2021. Moving to Slide #12 and then I will present the balance sheet of business activity. The balance sheet stayed at 6.9% annual growth in the net interest income during the second quarter of 2021 compared to the same period of the previous year. This was mainly explained by a decrease in the interest expenses for a value of COP 407 billion. On the other hand, there is a negative internal variation in the loan portfolio income for COP 301 billion. The gross margin grew by COP 50 billion, given the high activity of the bank, while expenses amounted to COP 16 billion, growing only 1.8% compared to 2020. Within this context, the bank closed the quarter with an efficiency ratio of 43.16%, which represents a decrease of 29 basis points compared to the second quarter of 2020. Finally, our net income decreased 30.2% compared to the same period of 2020. In terms of our balance sheet, total assets closed with COP 71 trillion with a decrease of 7% compared to the previous year. The gross loan portfolio registers an internal loan growth of 1.5% with a growth of COP 63 trillion balance. Similarly, customer deposit decreased to 6.1% year-on-year, closing with COP 53 trillion balance. Regarding the risk indicators, we observed for May 2021, a 150 basis point reduction in our NPL ratio compared to May 2020. Furthermore, the cost of risk decreased 13 basis points in the same period. Finally, we have maintained remarkable solvency levels about the manual required by regulation, those in the second quarter of the year with a total solvency ratio of 13.45%, with a decrease of 46 basis points compared to the first quarter of 2021, and a decrease of 8 basis points compared to the second quarter of 2020. In summary, we closed the second quarter of 2021 with proper performance, both in activity and in the income statement. We will continue working on 3 fundamental aspects: growing portfolio share, improving our price experience and continue to grow in clients. Now turning to Slide #13. I would like to share the impact of the relief program of BBVA's Colombia's portfolio. During the second quarter of the year, the bank continued to monitor and apply the veteran support program path through the inbound and outbound channels provided by the bank. Due to the COVID-19 phenomenon with persistent and the need to keep generating financial conditions to strengthening the processes of reopening and economic reactivation, the government financial superintendence considered it necessary to extend the path application and its complimentary measures in risk management trade until August 31, 2021, according to external circular of 12. According to the above, it is possible to see the monetary scheme of the clients who adjusted to some type of relief of redefined high obligation of COP 17.4 trillion, of which 78.8% of the revelation corresponds to customers who had a previous letter to relief where of the total of this, 92.7% have already finished the request period. On the other hand, 20.5% of the valuation and amortization only 0.75% written off. We can see on Slide 14 that at the end of July 27, 2021 the grades with the finalized grades amounted with COP 12.7 trillion, of which 75.5% correspond to the portfolio of individuals. 16.3% corresponds to enterprises and 82% corresponds to SMEs. Although the results of the recovery management in this quarter were affected by the national strike, which is called the closure approach and seaports generating noncompliant repayment of -- of noncompliant repayment, 78.2% of the grades with grades finalized are currently amortized at only 0.3% is in default. I will now present the results for the second quarter of 2021 in greater detail, starting on Slide 15. The behavior of the bank's interest margin shows a year increase of 6.9% during the second quarter of 2021, equal to an increase of COP 105 billion. This is mainly explained by a decrease in net interest expenses of COP 407 billion equal to 37.8%, reflecting an increase in saving accounts corresponding to a COP 226 billion, followed by a decrease in terms deposit of COP 160 billion, which is equivalent to a 23.8% reduction and a decrease in banks and other financial obligations for COP 21 billion corresponding to 34%. Cost increased behavior is associated with the deposit rates. From June 2020 to June 2021, there was a reduction in the integration rate of separate bank of 400 basis points going from 2.75% to 1.75%. On the other hand, there is an increase in interest income of COP 302 billion explained by a decrease in the charge interest in the total portfolio, of which the most relevant is the commercial portfolio where a decrease of COP 185 billion in a consumer portfolio of COP 80 billion in credit card for COP 15 billion and a decrease in the housing portfolio of COP 8 billion. Unlike the above, the growth in the housing leasing portfolio of COP 50 billion equivalent to 11.3% as starts out. Regarding the bank's debt/PE income, this shows a 1.3% reduction equivalent to COP 1 billion, mainly due to a reduction in fee expenses of COP 41 billion equivalent to 60% due to the decrease in dollar expenses for commission for COP 42 billion and banking services for COP 131 billion, which corresponds to the reduction of the expenses by sales force generated by the bank today. This model sits to simulate the incremental cost and achieve an effective rate of the loan portfolio specialized in the mortgage, commercial and consumer portfolios. Furthermore, there is a growth in fee income of COP 41 billion equal to 16%, mainly expected by an increase in the business management fees for COP 11 billion and the increase in establishment affiliated to cards for COP 11 million and an increase in the branch network services for COP 6 billion. Concerning the operational costs, we can see that during the second quarter of 2021, there was a decrease in our efficiency ratio of 29 basis points. This is mainly explained by an increase in operating expenses due to the quarter with a 1.8% valuation accredited to a decrease of COP 16 billion compared to the previous year due to a decrease in general expenses of COP 27 billion or 12.8%. Similarly, personnel expenses increases by COP 12 billion or 3.8%. The increase is mainly due to balances for COP 12 billion related to employee benefits. It is also increased in the category of wages and salaries to a value of COP 6 billion that corresponds to the salary adjustment of 2021 and the flow hiring of personnel and contributions to health had amount to a value of COP 2 million. However, there is a 5.7% reduction at COP 37.6 million expenses for contributions and taxes and operational risk respectively. Additionally, the increase in operating expenses is also explained by an increase in computer programs and applications, was one-off increase correspond to COP 2.5 billion. There is also an increase in office equipment and computer equipment to the value of COP 637 million. On the other hand, provisions showed up COP 82 billion reduction equivalent to a total expenditure of COP 539 billion at the end of June 2021. The bank has assigned to the operation that benefited for support measures by the health emergency as of June 2021, a total of COP 1.3 trillion in the individual loan portfolio provision for COP 65 billion -- COP 55 billion of interest general provisions in compliance with the external circular of 22 issued by the Colombia Financial Superintendence and in chapter 2 of external circular 100. Finally, as we see in the lower part of Slide 15, BBVA Colombia registered their net profit for the end of June 2021 for a value of COP 470 billion. This profit is 30.2% higher than the registered in the second quarter of 2020. Turning to Slide #16. BBVA Colombia continues to its proactive management of the recovery area to focus on clients that can reduce the impacts on local and consolidated arrears, which finally makes benefits interests of the consolidation of the bank's provisions. Consequently, in May 2021, the NPL ratio stood at 2.67%, which represents a decrease by 150 basis points compared to the previous year. Similarly, compared to May of 2020, the cost of risk stood at 2.1% with a decrease by 13 basis points. As of May 2021, we can see that the NPL ratio for the consumer and mortgage portfolio improved considerably compared to the data registered in the same period for the previous year, with a decrease of 168 basis points and 167 basis points, respectively. In addition, the commercial portfolio quality remains at lower levels than the sector average giving our low participation in problematics and transactions. Finally, BBVA Colombia is a wide top online with Basel III policies that allow asset calculation only where there is no viability of recovery. As shown in the upper right-hand cornered graphic, BBVA's NPL ratio plus write-off compared very positively to -- with the sector showing a 76 basis point reduction, exhibiting a higher quality of our portfolio. We can find the consolidated income statement in the second quarter of 2021 on Slide 17. Now we will go to the main tiers of our balance sheet and commercial activity. On Slide 18, during the second quarter of 2021, there was a growth in the loan portfolio of COP 791 billion equal to a decrease of 1.56% compared to the second quarter of 2020. The recovery of the loan portfolio stands out with a 5.4% growth in the consumer portfolio and 6.2% in the mortgage portfolio. On the one hand, the portfolio with the highest concentration is the consumer portfolio, which shows a COP 1 trillion growth. The line that promoted this growth was payroll loan followed by preconstruction on vehicles. It's worthy to mention that credit card management, since during the second quarter of the year, sales exceeded previous quarter by 12% and reached historical records with 80,500 new cards. This execution is a result of pre-approved offer generation, the digital sales contribution and campaigns carry out with the work together with MasterCard. In the same way, the mortgage portfolio shows an annual COP 730 billion growth equal to 6.2%. In housing, there was a decrease in turnover of 34% compared to the levels before the pandemic, thanks to the risk policies' flexibility that allow us to reach more profiles. This especially leveraged by a competitive commercial offer the benefits of the government and the digital fair held in June, which had a radio and digital channels presence. Finally, the commercial portfolio presenting a COP 976 billion reduction equal to 4.7% and the leasing portfolio percent that grew to 2.3% with COP 11 billion variation. On Slide 20, we show the funding sources composition during the second quarter of 2021. BBVA Colombia maintained a solid liquidity position where both commercial and institutional resources have increased. The strategy is to maintain the financing sourcing diversification and the robustness of the financing structure. Customer funds showed a decrease of COP 3.4 trillion, which serves a negative variation of 6.1% for the quarter at COP 53 trillion. The dynamics presented by the deposits were marked by current account, which grew by 12.3% during the second quarter of 2021. On the other hand, saving accounts showed a 2.8% reduction compared to the same quarter of the previous year. However, there is an 8% growth compared to the first quarter of 2021, explained by management in patient accounts, payroll accounts and saving programs. Finally, term deposit decreased by 16.5% annually. This is associated with the source of deposit of the organization to adequately manage the financing margin, obviously, taking into account the legal liquidity requirements. This decrease is also explained by the global pandemic situation that generated an economy with falling rates. Going on to Slide 21, we see the highlights of the business activity. The bank registered a positive balance to the second quarter of 2021 with COP 52.6 trillion. In the loan portfolio, BBVA Colombia remained in fourth place with a market share of 10.21% at the end of May 2021, which presented a 3 basis point decrease compared to May 2020. In May 2021, the portfolio of individuals retaining third place in the market with a market shares of 14.34%. This represented a positive 2.2 basis point variation when compared to the same month of 2020. The consumer portfolio reached a market share of 13.30% in an increase of 18 basis points compared to May 2020. Similarly, credit cards showed an increase of 93 basis points, reached a market share of 7.79%. Furthermore, mortgages reset a market share of 15.69%. On this part, the commercial portfolio registered a market share of 6.85%, increasing 31 basis points compared to the same period for the previous year, maintaining a fifth place in the market. Concerning customer deposits, BBVA Colombia ranked fourth in the market in May 2021 with a share of 10.81%, which presented a negative variation of 107 basis points compared to the previous year. In this way, the share of saving accounts relisted a decrease on the unit share for 152 basis points, and it was positioned in the fourth place with a share of 10.05%. On the other hand, current accounts show a negative variation of 13 basis points, and it was located in the third place in the market with a share of 10.89%. Finally, the deposit certificate shares stood 13.1% and showed a decrease of 56 basis points thus maintaining the fourth position in the market. In terms of our capital structure on Slide 22, BBVA Colombia closed the second quarter of 2021 with very good lows on solvency and liquidity, which respond to the requirements of the regulated and corporate standards. BBVA Colombia's capital structure is quite robust with Tier 1 capital represents on average 73% of regulatory capital. This has been achieved due to the policy of decreasing the legal reserves with the undistributed profits of this year. The bank's payout remained at 50%. Given the above, during the second quarter of the year, the regulatory solvency ratio grows at 13.45%. We have already been more regulatory indicators representing a decrease of 26 basis points in the solvency ratio compared to the first quarter of 2021 due to a significant increase in risk-weighted assets in the corporate and household portfolio of 63 basis points, offset by a decrease in greatest portion to derivatives and decrease in market value at risk of 84 basis points. Finally, there is an increase in operational value at risk as indicator of gradual internal loss has changed, which went from 0.7 to 1 according to the regulations. This gradual change is generated early each year since BBVA Colombia anticipated the standard application. On the Slide 23, we find our detailed balance sheet, which was before mentioned in the main highlights of the quarter. In conclusion, we closed the second quarter of 2021 with a remarkable performance, both in activity and the income statement, but they are both framed by the better dynamics of the economy. We are betting on the strategic transformation of the Colombian financial sector, and we will have to continue doing so during the second half of the year to improve the future of all. We hope to continue growing and generating a greater contribution to our head shareholders, employees and society general. With this, I have finished my presentation and open the line for any questions you might want to ask. Remind that if you want to ask a question, you can see in the chat, or you can use the raise-your-hand button that can be found in the bottom right section of your screen.

Since there are no questions, then we conclude our event. We appreciate your participation, and we hope you have an excellent day.