Banco BBVA Argentina - Q4 2022

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 Fourth Quarter and 2022 Fiscal Year 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 presentation. After the company's 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 the operator. 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 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 2021, filed with the U.S. Securities and Exchange Commission. Today with us, we have Mrs. Carmen Morillo Arroyo, CFO, Mrs. Inés Lanusse, IRO, and Ms. Belén Fourcade, Investor Relations. Ms. Fourcade, you may begin your conference.

Belén Fourcade (Investor Relations Manager)

Good morning, welcome to BBVA Argentina's Fourth Quarter and 2022 Fiscal Year Result 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 first, 2020, as per central bank regulation, we have begun reporting results applying hyperinflation accounting pursuant to IFRS rule IAS 29. For ease of comparability, 2021 and 2022 figures have been restated to reflect the accumulated effect of inflation adjustment for each period through December 31st, 2022. Now let me turn the call over to Inés.

Inés Lanusse (Investor Relations Officer)

Thank you, Belén, thank you all of you for joining us today. As we are all aware, in spite of a less favorable global context and a local environment defined by the difficulty of correcting current macroeconomic distortions and meeting the established objectives in the loan agreement reached with the IMF, economic activity has shown dynamism in 2022. According to BBVA Research, evidence suggests that GDP will increase 5% in 2022. Nonetheless, the global context, high local inflation, financial volatility, uncertainty about economic policy, and the limited leeway to adopt new stimulus measures legitimates the expectations of a contraction of GDP in 2023. Referring to BBVA Argentina's performance, a better operating income in 2022 was the product of an improvement in interest income and interest from government securities.

BBVA Argentina has a corporate responsibility with society, characteristic of the bank's business model, which encourages inclusion, financial education, and supports scientific research and culture. The bank works with the highest integrity, long-term vision, and best practices, and is present through the BBVA Group in the main sustainability indexes. Moving into business dynamics, as you can see on slide three of the web presentation, our service offering has evolved in such a way that by the end of December 2022, retail digital client penetration reached 62%, remaining stable from a year back. While that of retail mobile clients reached 55% from 53% at the same period of the 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 have increased from 80% in the fourth quarter of 2022 to 83.9% of units, and represent 56.9% of the bank's total sales measured in monetary value, versus 52.9% in the fourth quarter of 2021. New customer acquisition through digital channels reached 72% in the fourth quarter of 2022, from 66% in the fourth quarter of 2021. The bank actively monitors its business, financial conditions, and operating results in the aim of keeping a competitive position to face contextual changes. Moving to slide four, I will now comment on the bank's fourth quarter 2022 and 2022 fiscal year financial results. BBVA Argentina fourth quarter 2022 net income was ARS 17.1 billion, increasing 50.9% quarter-over-quarter.

This implied a quarterly ROE of 19.4% and a quarterly ROA of 3.6%. Operating income in fourth quarter 2022 was ARS 61.7 billion. 8.6% above the ARS 56.8 billion recorded in the third quarter of 2022. This is mainly explained by greater interest income, driven by a higher monetary policy rate compared to the previous quarter, which allowed net operating income to increase more than operating expenses. This effect was partially offset by an increase in, one, other operating income, two, loan loss allowances, and three, a fall in foreign exchange and gold gains.

It is worth mentioning that in fourth quarter 2022, income from net monetary position decreased 12%, giving a lower quarterly inflation, which changed from 22% in the third quarter of 2022 to 17.3% in the fourth quarter. BBVA Argentina 2022 net income was ARS 57.9 billion, 40.5% higher than the ARS 41.2 billion reported in 2021. This implied an accumulated annualized ROE of 17.5% and an ROA of 3% in 2022, compared to an accumulated annualized ROE of 13.5% and an ROA of 2% in 2021.

The increment in the bank's operating income is mainly explained by, one, an increase in interest income, mostly due to an increase in the position and yield of central bank instruments, and two, better net income from financial instruments at fair value through P&L, explained by an increase in the position of LELIQ and inflation-linked national treasury bonds, and by the sale of the remaining participation of the bank in Prisma during the first quarter of 2022. Turning into the P&L lines in slide five and six, net interest income for the fourth quarter 2022 was ARS 106.1 billion, increasing 18.1% quarter-over-quarter.

In fourth quarter 2022, interest income in monetary terms increased more than interest expenses, mainly due to, One, greater income from government securities, Two, an increase in income from interest from loans, in particular credit cards and discounted instruments, and Three, increase in income from REPO. The items mentioned take place in a context of increasing interest rates resulting from an increase in the monetary policy rate by the central bank, as well as an increase in inflation rate. In fourth quarter 2022, interest income totaled ARS 201.7 billion, increasing 19.2% compared to the third quarter of 2022. Quarterly increase is mainly driven by, One, higher income from government securities, both from an increase in the nominal rate and the volume in the position of LELIQ.

Two, an increase in interest from loans, mainly credit cards and discounted instruments, especially due to the increment in interest rate and higher activity. Three, an increase in REPO premiums. Interest expenses totaled ARS 95.6 billion, denoting a 20.4% increase quarter-over-quarter. Quarterly increase is described by higher time deposit expenses, although slightly offset by a fall in CER-UVA adjustment expenses, the latter connected to CER-linked time deposits. Interest from time deposits, including investment accounts, explain 79.9% of the interest expenses, versus 70.9% in the previous quarter. In 2022, net interest income totaled ARS 339.4 billion, led by interest income from higher position and higher yields from public and central bank securities.

Net fee income as of the fourth quarter of 2022 totaled ARS 10.2 billion, decreasing 4.9% quarter-over-quarter. In the fourth quarter of 2022, fee income totaled ARS 19.8 billion, increasing 2.1% quarter-over-quarter. The quarterly increase is mainly explained by fees from credit cards growing 4.2%, mostly due to more activity and consumption, and fees linked to loans. Regarding fee expenses, these totaled ARS 9.6 billion, increasing 10.8% quarter-over-quarter. Higher expenses in the quarter are partially explained by expenditures linked to credit and debit cards due to higher client acquisition costs, processing fees, and higher expenditures in seasonal commercial promotions.

Net fee income in 2022 remained stable with an increase of 1.4% as a result of a 6.4% drop in income and a 15.2% drop in expenses. The behavior in fees was mainly explained by the change of the credit card loyalty program from LATAM to Puntos BBVA. In fourth quarter 2022, loan loss allowances increased 52.7%, mainly due to the update in the IFRS 9 impairment loss model parameters. This also explains the yearly increase. During fourth quarter 2022, total operating expenses were ARS 57.5 billion, increasing 12% quarter-over-quarter, of which 32% were personal benefits costs remaining stable versus third quarter 2022. Personal benefits increased 12.7%.

The quarterly increase is partially explained by the effect of collective agreement on wages with the unions on the fourth quarter, 2022, an increment in personal compensation and bonuses, and an increase in employee training expenditures. Administrative expenses increased 1% quarter-over-quarter. The quarterly increase is partially explained by, One, an increase in taxes, Two, greater expenses in advertising costs, and Three, an increase in outsourced administrative expenses. The negative effect of the aforementioned items was offset by a decrease in rent and software. The quarterly efficiency ratio as of the fourth quarter, 2022, was 53%, improving compared to the 64.8% reported in the third quarter, 2022. The quarterly improvement is explained by a lower increase in expenses than income, especially due to a significant improvement in interest income and lower quarterly results from the net monetary position.

The accumulated efficiency ratio as of 2022 was 63.9%, improving compared to the 69.1% reported in 2021. The yearly improvement is also explained by a significant improvement in interest income. In terms of activity, on slide seven, total consolidated financing to the private sector in the fourth quarter, 2022 totaled ARS 734 billion, increasing 7.5% quarter-over-quarter and contracting 3.1% year-over-year. Loans to the private sector in pesos increased 7.8% in the fourth quarter, 2022.

During the quarter, the increase was especially driven by a 34.1% growth in discounted instruments, a 4.3% increase in credit cards due to the growth in activity, followed by a 12.1% increase in overdraft and a 5.1% in other loans. The latter are affected by greater flow planning activities, through which the automotive consolidated financial company's official dealership network gets its financing for vehicle stocks, spare parts, and other goods. Loans to the private sector denominated in foreign currency slightly increased 1% quarter-over-quarter and remained practically stable, falling 0.5% year-over-year. Quarterly increase is mainly explained by a 38.6% increment in other loans, and partially offset by a 36.1% fall in credit cards.

Loans to the private sector in foreign currency measured in U.S. dollars fell 1.5% quarter-over-quarter and increased 12.4% year-over-year. During the quarter, both the retail and commercial portfolio fell in real terms. Loan portfolio were highly impact by the effect of inflation during the first quarter of 2022, which reached 17.3%. In nominal terms, BBVA Argentina managed to increase the total loan portfolio by 25.6% during the quarter. BBVA Argentina's consolidated market share of private sector loans reached 9.10% as of the fourth quarter, 2022, improving from 8.05% a year ago. In fourth quarter, 2022, asset quality ratio was 1.13% compared to the 1.07% recorded in the third quarter, 2022.

The mined increase is mainly explained by an increase in the retail non-performing portfolio. The update of the IFRS 9 impairment loss model parameters had an impact on the coverage ratio, which reached 242.23%, above the 236.89% recorded in the third quarter 2022, and on the cost of risk, which reached 4.09% on fourth quarter 2022, above the third quarter 2022's 2.65%. On the funding side, as seen on slide eight, private non-financial sector deposits in fourth quarter 2022 totaled ARS 1.3 trillion, falling 12% quarter-over-quarter and 3.7% year-over-year. Quarterly decrease was mainly explained by sight deposits.

The bank's consolidated market share of private deposits reached 6.64% as of the fourth quarter of 2022. Private non-financial sector deposits in pesos increased 2.9% compared to the third quarter 2022. The quarterly change is mainly affected by a 15.7% increase in sight deposits, followed by time deposits by 8.4%. This was partially offset by a decrease in investment accounts by 17.9%.

Private non-financial sector deposits in foreign currency expressed in pesos grew 16% quarter-over-quarter, mainly due to a seasonal effect. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators in fourth quarter 2022. Capital ratio reached 26.1%. Exposure to the public sector in the fourth quarter 2022, excluding central bank instruments, represent 10.1% of total assets, slightly above the 9.8% in the third quarter 2022 and way below the 16.4% reported by the system as of December 2022. It is worth mentioning that as the date of this report, BBVA Argentina has distributed dividends by ARS 13.2 billion installments one to 12 according to the established schedule published on June 16th, 2022.

The bank's total liquidity ratio remained healthy at 78% of total deposits as of December 31st, 2022. This concludes our prepared remarks. We will now take your question. 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 telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Rodrigo Nistor with Latin Securities. Please go ahead.

Rodrigo Nistor (Head of Equity Research)

Hi, everyone. Thank you for the opportunity. I have a few questions about your outlook for this year and the recently announced debt exchange. In 2022, BBVA posted an ROE of 17.5%. Do you believe this level of profitability is sustainable in the long run? If you could provide some insights into the outlook for the current year, specifically, what are your expectations for loan deposit growth? Thank you.

Carmen Morillo Arroyo (CFO)

Hi, Rodrigo. Nice talking to you. Okay, yes, as you mentioned, we posted an ROE of 17.5%. We believe this ROE is sustainable, basically because we see the monetary policy rate increasing, particularly in the second half of 2023. According to research from the actual 75%, it could reach 85% by the end of 2023. This extra expansion in margins could help us sustain the ROE at the actual levels. Our macroeconomic projections, to give you an idea, are mainly for GDP. We are seeing the 2022 ending around 5.2% growth. For 2023, we are seeing a contraction of 1%. Inflation, which, as you know, ended around 95%, a little bit less.

We are projecting for 2023, 105%. The official FX, we are projecting for the end of 2023, ARS 355. That is official FX. Regarding loan growth, we ended the year with a negative growth of only -3%, decreasing in real terms less than the system. The system decreased 29%, we're able to gain market share in the loan book. For 2023, we are projecting loan growth a little bit below inflation, around -2%. Similar levels to what was this year. We are growing our loan book particularly in the commercial, in the commercial lines now, with SMEs mainly.

For deposits, we ended 2022 with -4%, a little bit more than the system. The system ended in -2%. For 2023, we are projecting also negative real growth, but in line with loans, also -2%.

Rodrigo Nistor (Head of Equity Research)

Okay, thank you. Then a quick follow-up on with regards to the recently announced debt exchange for treasury loans. What is your intention if you're planning to participate or how do you think of this exchange? Thank you.

Carmen Morillo Arroyo (CFO)

Yes. Basically we have an exposure of around ARS 195 billion of treasury exposure that excludes LELIQ. From that, more or less ARS 45 billion are reserve requirements. We have ARS 150 billion left. From that number, from that figure, less that we would go into the voluntary exchange with less than ARS 50 billion. That includes all the bonds that mature between today and June the thirtieth. Just to give you a reference, basically you have to say that ARS 195 billion I mentioned represent more or less 50% of our equity. Compare that to the system, that for the system it represents 80% and for the private only 60%.

The debt in ARS is only 7% to GDP and sorry, only 7% of the debt in ARS is in hands of private holders. That is basically our view. Now we are gonna go with less than ARS 50 billion into the voluntary exchange.

Rodrigo Nistor (Head of Equity Research)

That was really helpful. Thank you.

Operator (participant)

Again, if you have a question, please press star then one. Please stand by as we poll for questions. Showing no further questions, this concludes the question-and-answer session. At this time, I would like to turn the floor back to Mrs. 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 good day.

Operator (participant)

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