Banco Hipotecario S.A. (BHIP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Banco Hipotecario's Year 2020 Earnings Release Call. [Operator Instructions] Today, Mr. Martin Diez, Banco Hipotecario's CFO; and Mr. Eliezer Baschkier, Capital Markets and Asset and Liability Management supervisor at Banco Hipotecario will be presenting. I would now like to turn the conference over to Mr. Martin Diez. Please go ahead.

Thanks, Milagro. Hello, everyone. Thanks for joining us on our 2020 consolidated results for the year. The bank began reporting results applying hyperinflation accounting in accordance to IFRS rule IAS 29, as established by the Central Bank as of the first quarter of 2020. Therefore, every result and variation described in this report is expressed in constant currency as of December 21, 2020. Also, the provisioning model of IFRS 9, Section 5.5 was applied, as established by the Central Bank. Net income attributable to owners of the parent company for the year was ARS 916.6 million compared to minus ARS 3,722.7 million of last year. Net income attributable to owners of the parent company for the quarter was ARS 648.8 million compared to ARS 182.4 million of the last quarter and minus ARS 1,666.7 million of the third quarter of last year. The net operating income for the year was ARS 21,406.6 million compared to ARS 24,629.5 million of last year. Net operating income for the quarter was ARS 5,689.8 million compared to ARS 5,362.8 million of the last quarter and ARS 3,678.2 million of the same quarter last year. The operating income for the year was ARS 3,537.3 million compared to ARS 1,252.7 million of last year. Operating income for the quarter was ARS 1,139.1 million compared to ARS 764.1 million of the last quarter and minus ARS 1,584.3 million in the same quarter last year. During the fourth quarter of 2020, the liquidity coverage ratio was 120%, net stable funding ratio was 162.7% and the liquid assets to deposits was 84%. Loans to nonfinancial private sector and foreign residents decreased 18.4% year-over-year, and deposits increased 82.7% year-over-year, while capital market debt decreased 50.7% year-over-year. On a consolidated basis, NPLs decreased from 12.3% in the fourth quarter of 2019 to 12% in the fourth quarter of 2020. Besides, NPLs in the consumer portfolio decreased from 7.7% to 2.9% during the same period. Coverage ratio remained at 92.8% for the period. Total capital ratio as a percentage of risk-weighted assets as of December 31 of 2020 was 19.4% compared to 14.2% on the same quarter of last year. Return on average equity was 5.4%, and this compares to minus 22.4% of 2020 (sic) [ 2019 ]. These are the main highlights that we have summarized for the 31st December. But let me add some color on the keys that we understand that drove the results on the year. The first one would be that we had a lower net interest income. This has 2 fronts. First of all, the economy as a whole has lower active rates due to policy changes -- monetary policy changes done by the Central Bank. And also, there has been an impact on the active rates, mainly on the credit card business due to regulated rate that were capped at the beginning of 2020. This also had an impact on the rates that we pay for deposits since the fixed-term deposit were imposed with a minimum rate that we had to pay. So that also had an impact on the net interest income. Second, we would say that lower fees and commission is another driver for the results. This is mainly due to the fact that the Central Bank also freezed the fees at the beginning of 2020, and we have not been able to raise them. So this had an impact on our fees and commission business. We also had a considerably lower gold and FX rate differences. But this has to be read in a combination with the line of the net interest income and also with the line of the net income from financial instruments at fair value through profit and loss since these 3 concepts are related on the way we cover or we hedge our monetary position. Also, we had a lower loan loss provision, I would say considerably lower when you compare to 2019. That was a year that was highly impacted by the raise of NPLs that we had during 2018 and the beginning of 2019. Another driver for the result of the year was the lower expenses, not only personnel expenses and administrative expenses but also operating expenses. This expense reduction has been considerable, and it was done through a very painful process that we had to go through during the year. And also, it has, especially on the operating expenses, something related to a COVID outbreak that since we have seen a reduction of the business, we've also seen a reduction of operating expenses. But this is mainly due to all the effort that we did during the year in order to reduce expenses. And the other 2 explanatory variables will be the lower inflation that we had in 2020 compared to 2019, but also the higher income tax that we paid on 2020 against 2019. I would say that these are the keys that explain the difference in the result that we consider a very good result. As for us, having a positive ROE in terms of 5.4%, it's a very good result. But this is not the only takeaway that we had from 2020, as there are many things, both qualitative and quantitative things. One is, I believe that we discussed during all of the year last year and mainly on our last -- or on the third quarter conference results, it was the successful refinance of our 2020 dollar-denominated debt that matured on November 30 of 2020. That transaction was very important for us because it allowed us to reduce the interest expenses from now on, but also to have a smooth amortization of our capital market debt. Also, another key takeaway of the year is the positive ROE in real terms, as I mentioned before. And very healthy growth on deposits that grew considerably above inflation, both core and noncore deposits. Also, on the qualitative side of the business, we have redesigned our digital transformation unit, focusing on agility, and we are trying to expand agility for the rest of the bank, not only to have it as a silo on the digital business. That's very important for us since we are a bank that has a small number of branches. So we rely a lot on the future of digital banking. Also, as a qualitative item for the year, we highlight the handling of the COVID-19 outbreak that allowed us to work almost all of the headquarter from home and also to implement a model on the branches where we split it between half of the personnel going 2 weeks and the other half going on the next -- on the following 2 weeks. That allowed us to continue to operate without any considerable impact on the -- of the COVID-19. We expect to be redefining our operational model in the next month, and this will depend a lot on how the vaccines are deployed in Argentina and what are the numbers of the COVID-19 impact, meaning that we are not going to come back or go back all to the headquarter if this is not already controlled by the government, but we have been going back to the branches. And now we have changed the operational model of the branches, putting more people. Instead of doing this 15 days comes and goes, we have made a change to that model where all the branch is operational, and we have guards that can cover the people in case of -- if we have any cases in the branches. So I would say that these are the main drivers of the results and key takeaways of the year. But I will now hand it to Eliezer, who is going to explain even further or give you some color on the NPL side.

Good morning, everyone. And let me review briefly the rules that the Central Bank issued last year regarding installments that the clients could not pay. At the end of March, the Central Bank issued the first communication in which it established the rules that were on one side for credit cards and on the other side for loans, both personal loans and loans to enterprises. On the side of the credit card loans, on March, it established that the unpaid credit card balances on April will have to be refinanced in 12 months loans with a 3-month grace period in the beginning, and that's happened again for the balances of September. After the year, we saw our -- the main concern was how we -- how those refinanced balances will behave, the first one is starting in August because that was the end of the rate period for that refinancing of April. And then the refinancing of the balances of September that started to pay in January after the 3-month grace period. And the behavior of that refinance credit card portfolio transforming to loans has been behaving relatively well with -- similar to other refinancing plans. So that concern is controlled. And the other thing that the Central Bank issued in that communication was that installments that were not pay initially, installments that were between April 1 and June 30, those installments that were not paid would be, let's say, transferred to the end of the loan and with, of course, paying interest. And then Central Bank extended that a couple of times. Now the last extension is until the end of March 2021, March 31, 2021. Let me review briefly the numbers of the retail portfolio and the commercial portfolio. During 2020, the amount of installments of the retail portfolio that were due were around ARS 6 billion, and the amount of installments that were, let's say, transferred to the end of the loan was ARS 1.5 billion approximately. So that's around 25% of the amount due for collection was transferred to the end of the loan. Thus, on the consumer portfolio, considering that when all of this started in April, last year, the economy was completely closed, and Argentina was already in the third year of recession. That's not as well as we could have imagined if we compare, for example, with the numbers of the 2001 crisis. That's on the retail portfolio. And then on the commercial portfolio, let's divide the commercial portfolio in the peso portfolio and the dollar portfolio. The dollar portfolio, nowadays, there were a couple of companies that didn't pay their installment because the country was closed until the end of July, approximately. After that, most of the companies that didn't pay an installment paid it. They didn't wait until the end of the loan. And nowadays, there is only one company that has an installment due of around ARS 10 million out of the peso portfolio of the corporate of ARS 2.7 billion that makes it 0.4% of amount due for collection last year in peso for the commercial portfolio, that was passed to the end of the -- to the loan. That's almost nothing. And then on the dollar portfolio, there were a couple of companies, too, that didn't pay at the beginning and then they paid nowadays. We have the amount that was not paid on installment last year is $6.7 million out of the total dollar portfolio of -- the commercial dollar portfolio of $112 million. That means that around 6% was not paid last year. So taking into account the whole situation in the country, being in Argentina, one of the longest quarantines in the world, the receivable portfolio was relatively good. That would be a brief summary of the situation of the collection last year. I don't know, Martin, if you have any additional remarks?

No, I don't. And if you want, we can open for questions if there's any.

[Operator Instructions] We'll go to the line of Riva Nicolas.

I have 3 questions. The first one. So last year, the loan book contracted 18%. That was a big contraction in nominal terms. You clearly preserved liquidity last year given the pandemic. You also had the maturity of the 2020 bond, which had a good resolution. You extended that and also paid off some of the people who didn't tender their bonds. So I want to ask you, looking now into 2021, and, of course, the economic context remains very challenging in Argentina, but when do you think you're going to be kind of ready to turn the corner to resume growth? And what's kind of your business strategy going forward? That's the first question. Second question, you touched, Martin, I think you mentioned this a bit in your remarks. But one thing that surprises is that personnel and administrative expenses were down a lot in 2020, even in nominal terms. You said that, that process was painful a bit, but if you can explain what you did a bit in 2020, if you reduced headcount, branches, any asset disposed? What explained that big drop in personnel and administrative expenses in 2020? And then the third question. So you mentioned the rate exchange, which was very positive. Now you have the 2025s. But the 2025s are going to start amortizing this year, I believe, 20% per year, the principal. And we saw last week that the Central Bank announced that they are extending the restrictions on FX access till the end of this year, till the end of 2021. I want to ask you -- my understanding is that, in your case, it's not going to impact your ability to, let's say, buy dollars from the Central Bank when the time comes to pay off that debt because you already restructured last year following them of the Central Bank guidelines. But I wanted to confirm that the FX restrictions are not going to apply in your case.

Thanks, Nicolas. Let me go through the questions one by one. The first one was related to where are we going to grow on loans. Again, it's a very good question. And as is also said, the political -- not the political, the economic environment in Argentina looks very challenging for the year. So we -- during the first quarter, we are growing but mainly due to the fact that we have to originate loans for SMEs as a mandatory thing that the Central Bank implemented. So we have been growing on loans, but this has not been something that we were looking for. It was something that was mandatory. But on the optional side of the growth loan, we are not planning to growth yet as we want to see more clarity on how the economy behaves. And I think that the next couple of months will be very important for that. So our idea remains to be that we want to grow on the -- on personal loans instead of credit cards, considering the share of wallet, on relative terms meaning. And also, we want to refocus our business on the corporate side as well that we have been cleaning our portfolio because of the cases of NPL that you all know. So we would like to grow once we see that the economy improves or at least when we see that it gives us some room to be really optimistic on that. The second one was related to how we were able to reduce the personnel expenses and administrative expenses. And I would say that personnel expenses when you see the reduction considered in the previous year was mainly due to the fact that the previous year, we had more employees on average than on 2020. It's not that we laid out people in 2020, that we're not -- I mean there has been a reduction in 2020, but it's not big, but there was a bigger one in 2019. So the impact of that, you see it on the following year. So we don't foresee this year an outcome of like the previous year because we expect the average number of employees to be quite similar to last year. That's on the personnel expenses. On the administrative expenses, we had a huge reduction. And that was mainly due to the fact that we have renegotiated with suppliers, we cut expenses. We were very restrictive on our expenses. I mean we created -- we don't want -- it's not something that I like, the commissions and all that, but we created an ad hoc commission last year in order to see opportunities to cut expenses. It was made from 4 different sectors of the bank that had as a goal for the year to reduce expenses throughout all the bank. That was very good, very successful and by healthy process online. This year, we are still working on that. I don't know if we are going to be able to capture so many opportunities as we did last year, but we are going to try to. And the third one was related to the central bank change on the regulation or extension on the 7106, that it was the requirement to refinance part of the maturing debt. And I agree with you that since we did this last year, and that was already covered by this Central Bank rule, we will not have to do it again. And that's what we've read from the Central Bank resolution. So is that all, Nicolas? Or you have any further question related to that? Did I answer your question?

Yes, Martin, you did. That was very clear.

[Operator Instructions] Well, allowing a few moments, I'm showing no other questions in queue. So Martin, continue.

If there are no further questions, I think that's it. Thanks, everybody, for joining us today. And okay, we'll discuss results again in a couple of months. Thank you very much. Buh-bye.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation in Banco Hipotecario's year 2020 earnings release. You may now disconnect.