Banco BBVA Argentina - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's second quarter 2023 fiscal year results conference call. We would like to inform you that this event is being recorded, and all participants will be in a listen-only mode during the company presentation. After company remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach an operator. First of all, let me point out that there are some statements made during this conference call that 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 BBVA Argentina's annual report on Form 20-F for the fiscal year 2022, filed with the U.S. Securities and Exchange Commission. Today, with us, we have Ms. Carmen Morillo Arroyo, CFO, Ms. Inés Lanusse, IRO, and Ms. Belén Fourcade, Investor Relations. Ms. Fourcade, you may begin your conference.

Belén Fourcade (Investor Relations)

Good morning, and welcome to BBVA Argentina's second 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 Inés 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 regulation, 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 the inflation adjustment for each period through June 30, 2023. Now, let me turn the call over to Inés.

Inés Lanusse (Investor Relations Officer)

Thank you, Belén, and thank you all for joining us today. As we are all aware, on Sunday, August 13, Javier Milei, the candidate for La Libertad Avanza, was the most voted in the primary presidential elections, quite above from what surveys were estimating. This implies a higher uncertainty scenario facing the general elections of October, and it is expectable that higher volatility will persist. At the same time, the unfavorable macroeconomic conditions have continued to deteriorate, increasing the risk of economic and financial turbulence ahead of the presidential elections scheduled for the last quarter of the year. GDP is expected to fall by around 3.5% this year, according to BBVA Research, due to the impact of the negative weather shock on the production and export of agricultural goods, coupled with increasing exchange rate restrictions and political uncertainty.

In this context, its impact on the external and fiscal account has contributed to accelerate the exchange rate depreciation and inflation, which in annual terms, reached 113.4% as of July 2023. Referring to BBVA Argentina's general performance, a better operating income as of June 2023 was a product of an improvement in interest income, boosted especially by government securities and liquidity instruments and better fee income. Now, moving into business dynamics, as you can see on slide 3 of our webcast presentation, our service offering has evolved in such a way that by the end of June 2023, retail digital clients penetration reached 62%, remaining stable from a year back. While that of retail mobile clients reached 56% from 54% as of the same period of last year.

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, have increased from 90.8% in the second quarter of 2022 to 93.9% in the second quarter of 2023, and represents 71.8% of the bank's total sales, measured in monetary value, versus 57.1% in the second quarter of 2022. New customer acquisitions through digital channels reached 75% in the second quarter of 2023, from 70% in the second quarter of 2022.

The bank actively monitors its business, financial conditions, and operating results in the aim of keeping a competitive position to face contextual challenges. Moving to slide 4, I will now comment on the bank's second quarter 2023 financial results. BBVA Argentina second quarter 2023 net income was ARS 30.4 billion, increasing 63.3% quarter-over-quarter. This implied a quarterly ROE of 21.3% and a quarterly ROA of 3.9%. Operating income in the second quarter of 2023 was ARS 125.3 billion, 28.6% above the ARS 97.5 billion recorded in the first quarter of 2023. Quarterly operating results are mainly explained by, one, better interest income results through public securities and liquidity instruments.

Two, better fee income, and three, higher net income from write=down of assets at fair value through OCI, mainly due to the voluntary bond swap offered in June by the National Treasury. This effect was partially offset by, one, an increase in other operating expenses, pushed by greater turnover tax due to a higher LELIQ position. Two, an increase in personnel expenses, and three, an increase in administrative expenses. Net income for the period was highly impacted by income from net monetary position, as inflation increased from 21.7% in the first quarter of 2023 to 23.8% in the second quarter of 2023.

Turning to the P&L lines in slide 5 and 6, net interest income for the second quarter of 2023 was ARS 185.5 billion, increasing 14.2% quarter-over-quarter. In the second quarter of 2023, interest income in monetary terms increased more than interest expenses, mainly due to, one, an increase in income from CER/UVA adjustment, driven by public securities with this adjustment. And two, a higher position and yield of public securities, in particular, of LELIQ. Additionally, there is a positive effect from income from loans, mainly discounted instruments and from repo operations. In the second quarter of 2023, interest income totaled ARS 371.2 billion, increasing 20.3% compared to the first quarter of 2023.

In the quarter, monetary policy rate gradually increased from 78% at the beginning of the quarter, up to 97% at quarter end. Interest expenses total ARS 185.7 billion, denoting a 27.1% increase quarter over quarter. Quarterly increase is described by higher time deposit expenses. Interest from time deposits, including investment accounts, explain 77.7% of interest expenses versus 82.8% the previous quarter. Net fee income as of the second quarter of 2023 totaled ARS 23.7 billion, increasing 69.3% quarter over quarter in real terms. In the second quarter of 2023, fee income totaled ARS 33.4 billion, growing 22.6% quarter over quarter.

The quarterly increase is mainly explained by an increment of fee from credit cards, considering that this line includes Puntos BBVA royalty program. Regarding fee expenses, these totaled ARS 9.6 billion, falling 27%. In the second quarter of 2023, loan loss allowances increased only 9.6% due to the good performance of our portfolio. During the second quarter of 2023, total operating expenses were ARS 92.6 billion, increasing 8.4% quarter-over-quarter, of which 31% were personnel benefits costs. Personal benefits increased 6.3% quarter-over-quarter. The quarterly increase is mainly explained by the inflation adjustment of vacation stock provisions.

Quarterly increases were also affected by a 25.8% collective agreement on wages, which implies a 56% accumulative increase as of the second quarter of 2023. As of the second quarter of 2023, administrative expenses increased 5% quarter-over-quarter. The quarterly increase is mainly explained by, one, outsourced administrative expenses, two, greater rent expenses, and three, increase in software services, all of them related to services contracted with the parent company. Being this said, the quarterly efficiency ratio as of the second quarter of 2023 was 42.8%, improving compared to the 62.4% reported in the first quarter of 2023. The quarterly improvement is explained by a higher increase in income than expenses, especially due to a significant increase in interest and fee income....

The accumulated efficiency ratio as of the second quarter of 2023 was 56.6%, improving compared to the 62.4% reported in the first quarter of 2023, and versus the 71.3% reported in the second quarter of 2022. In terms of activity, on slide seven, private sector loans as of the second quarter of 2023 totaled ARS 1.1 trillion, slightly decreasing 0.3% and 3.5% year-over-year. Loans to the private sector in pesos fell 1.1% in the second quarter of 2023. During the quarter, the decrease was especially driven by a 37.5% decline in overdraft, followed by a 6.8% fall in consumer loans.

The fall was partially offset by a 17.8% increase in discounted instruments and a 10.4% increase in other loans, the latter pushed by floor planning. Loans to the private sector denominated in foreign currency increased 12.1%. Quarterly increase is mainly explained by a 13.9% growth in financing and pre-financing of exports. Loans to the private sector in foreign currency, measured in U.S. dollars, increased 13% quarter-over-quarter. During the quarter, both the retail and commercial portfolio remained practically flat. As observed in previous quarters, loan portfolio were impacted by the effect of inflation during the second quarter of 2023, which reached 23.8%.

In nominal terms, BBVA Argentina managed to increase the retail, commercial, and total loan portfolio by 23, 23.8, and 23.4% respectively during the quarter, practically reaching quarterly inflation levels. BBVA Argentina's consolidated market share of private sector loans reached 9.01% as of the second quarter of 2023, improving from the 8.35% a year ago. In the second quarter of 2023, asset quality ratio was 1.38% compared to the 1.31% recorded in the first quarter of 2023. The slight increase is mainly explained by an increase in the retail non-performing portfolio.

On the funding side, as seen on slide 8, private non-financial sector deposits in the second quarter of 2023 totaled ARS 2 trillion, increasing 3.5% quarter-over-quarter. The bank's consolidated market share of private deposits reached 7.03% after the second quarter of 2023. Private non-financial sector deposits in pesos increased 6.7% compared to the first quarter of 2023. The quarterly change is mainly affected by, one, a 19.7% increase in savings accounts, which were partially pushed by exporters and agriculture producers' deposits linked to the Dólar Soja 3 program. Two, a 14.8% increase in checking accounts. And three, a fall in investment accounts by 18.9%, which offsets the growth in peso funding.

Private non-financial sector deposits in foreign currency expressed in pesos fell 8.5%. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators in the second quarter of 2023. Capital ratio reached 28.4%. Exposure to the public sector in the second quarter of 2023, excluding central bank instruments, represents 11% of total assets, above the 9.1% in the first quarter of 2023, and below the 17.3% reported by the system as of June 2023.

It is worth mentioning that as of the date of this report, BBVA Argentina has distributed 3 of 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 84.1% of total deposits as of June 30, 2023. This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Carlos Gómez. Please go ahead.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions, Equity Research)

Hello, Inés. Good morning. Thank you for organizing the call. A general question about how you contemplate the end of this year and the beginning of next year. How is the bank positioning in terms of liquidity, in terms of willingness to expand, to take risk or do the opposite, and how you can hedge yourself against unexpected inflation or unexpected foreign currency movements? Thank you.

Inés Lanusse (Investor Relations Officer)

Hello, Carlos, nice to hear from you. Okay, it's quite uncertain, the projection for Argentina. Actually, in this period of the year is when we prepare our budgets, and it's difficult to project, no? Our research department is updating, for example, inflation practically on an every day basis. We are already in levels to the end of the year, around 175%-200% monetary policy rates, although it has already been increased last week to 119%, we are still expecting a higher monetary policy rate for the end of the year, around 138%.

But it's still difficult to say when that increase is gonna take place and how, how much it's gonna be, and at what, basically to understand if interest rates will remain positive or negative. Also projection for official USD is projected today in 700 pesos per dollar at the year-end. But again, macro variables are moving every day, and this is tied also to the political uncertainty, no? As you know, Milei won. This was unexpected, and today we have not only a possibility that Milei can be president, but we have three very strong parties running for the presidential elections. Being that said, as you see the numbers of the bank, the bank has reported very good results, very good ROEs, ROAs, all positive in real terms.

Our loan growth this quarter has remained flat, but if you see our market share from one year ago, it's still growing. We are around 9%. The bank is basically trying to protect the balance sheet from inflation. This has been a quarter where inflation has increased, and the strategy of the bank is to acquire mainly CER bonds that protect our balance sheet for inflation. That keeps being the main focus of the bank going forward, and we need to see how the macroeconomic environment evolves to prepare the bank for the future. It's a tough question to answer, because the macro variables are not clear enough for us to understand how the bank is gonna be prepared.

But the bank has good liquidity, both in pesos and dollars, has the protection of the balance sheet, is improving efficiency ratios, fees are improving, the margin obviously is improving. So we believe we are one of the banks that is in a good position to keep reporting good results this year and the next.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions, Equity Research)

Okay. So again, to summarize, at this point in time, meaning today, Thursday, your inflation forecast is 175%, and your monetary policy 135?

Inés Lanusse (Investor Relations Officer)

For the year-end, it's between 175 and 200. Still not defined.

Because the last one was 175, but we know they're working on a higher probably inflation rate for the year-end. And monetary policy-

-rate, again, it's still not defined, but probably around 138 can be a possibility. But again, it's not a fixed number. Numbers are changing on an every day basis. It's difficult to-

Carlos Gomez-Lopez (Head of LatAm Financial Institutions, Equity Research)

Okay

Inés Lanusse (Investor Relations Officer)

... to tell you the numbers today, that may change tomorrow. What we know, that we believe there is gonna be an extra increase in monetary policy rates. It's not, it's not gonna be remaining in 118, because we still see the assets increasing, no? Before the end of the year.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions, Equity Research)

Right. Okay. And again, these monetary policy rates, these are the monthly rates which, compounded, give you a number above 200%.

Inés Lanusse (Investor Relations Officer)

Yeah, the inflation rate, yes. Year-end, 200%.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions, Equity Research)

All right. The second question, in terms of the results of the second quarter, and I have asked it to other banks as well, we have seen that all the banks have reported high profitability in this second quarter. Again, is there any element of either seasonality or surprising rates or surprising inflation that has made the second quarter special, or is there something that, you know, we could project into the third or the fourth quarter?

Inés Lanusse (Investor Relations Officer)

It has to do with the increase in the monetary policy rate that you had in the second quarter, that went from 78% to 97%, remember, by the end of the first quarter to the second quarter, and that had a repricing also in loans. The other factor is the position in CER and LELIQ, no? From our public sector exposure to the LELIQs represents 76% and increasing. So that is part of the results that all the banks are presenting. Most of the NII of the banks is increasing mainly by public sector exposure, which is high, but controlled, no? In the case of us, probably more controlled than other banks because of our parent company.

So mainly the increase in the NII and the good result has to do with that, with the increase of monetary policy rates and the position in public sector assets.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions, Equity Research)

Thank you so much, Inés.

Inés Lanusse (Investor Relations Officer)

You're welcome.

Operator (participant)

Next question comes from Ludovic Casroge. Please go ahead.

Ludovic Casroge (Analyst)

... Yes, good morning and congratulations for the result. I've got two questions. The first one is about the impact of the devaluation of the official FX rate on your result and on your book value, your equity. What would be the impact of the devaluation of the FX official rate? And the second question is regarding the consolidation that we have seen on the market with Banco Macro buying out Itaú Argentina. Would BBVA Argentina be interested in external growth, buying out a local subsidiary of foreign bank or merging with a competitor? Would you be interested in external growth?

Inés Lanusse (Investor Relations Officer)

Sorry, I didn't understand the last part of your question. I understood the part of BMA buying Itaú, but the last part was?

Ludovic Casroge (Analyst)

The last part was if BBVA Argentina could be interested in buying a subsidiary of an international bank, or to merge with another local bank.

Inés Lanusse (Investor Relations Officer)

Okay. Let me start by the last question. Regarding the Itaú and BMA acquisition, I think it's a good position for BMA. It's a bank that offers a good branch network in the area where BMA had less branches. So, I think it's a good merger for them. If you see, again, today with the last information of the system is March, but with those information, market shares and ranking stay quite stable. There's not much change by BMA acquiring Itaú, but I believe it's a good acquisition for BMA's strategy. Regarding us, again, it's a very unstable moment, so it's difficult to say what other M&A is gonna take part.

BBVA, as a bank, looks out of every opportunity, and is planning to remain in the market. So any opportunity that may rise up, we take a look at it and see if it's an opportunity for us.

Ludovic Casroge (Analyst)

Okay.

Inés Lanusse (Investor Relations Officer)

Okay. Regarding the evaluation, that was the other part of your question. As you know, by recommendation, we have a cap in the position that we can have loan in assets, basically to avoid this high increase in results because of a sudden devaluation. Being that said, we have some bonds tied to FX that helps our results in FX. And basically, that's the, that's what we can do, no? There is not much we can do there. There's—it's quite limited what we can do regarding devaluation.

Ludovic Casroge (Analyst)

Okay. Thanks a lot.

Inés Lanusse (Investor Relations Officer)

You're welcome.

Operator (participant)

This concludes the question and answer section. At this time, I would like to turn the floor back to Ms. Lanusse for any closing remarks.

Inés Lanusse (Investor Relations Officer)

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

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.