Banco BBVA Argentina S.A. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Argentina's First Quarter 2024 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 remarks are completed, there will be a question-and-answer section. 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 US 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 20F for the fiscal year 2023, filed with the US Securities and Exchange Commission. Today, with us, we have Ms. Ines Lanusse, IRO. Ms. Lanusse, you may begin your conference.

Good morning. And welcome to BBVA Argentina's first quarter 2024 results conference call. Today's webinar will be supported by a slide presentation available on our Investor Relations website in 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 regulation, we have begun reporting results applying hyperinflation accounting pursuant to IFRS rule IAS-29. For ease of comparability, 2023 and 2024 figures have been restated to reflect the accumulated effect of inflation adjustment for each period through March 31, 2024. Now let me turn the call over to Ines.

Thank you, Belen. And thank you all for joining us today. 2024 starts with the newly elected government substantially modifying the economic policy framework and focusing its efforts on strong fiscal and monetary adjustment to reduce inflation. The reduction of the fiscal deficit in the first months of the year, the relative currency stability observed after the significant depreciation of the Argentine peso in December 2023, the accumulation of international reserves, and the contraction of economic activity have allowed a recent moderation of the monthly inflation, which, however, still remains high. In spite of the uncertainty and related risks, according to BBVA Research, it is likely that these factors could set the basis for an inflation slowdown in the coming months. These would eventually be complemented by additional measures in the context of the release of a more comprehensive stabilization program. BBVA Research estimates annual inflation will end close to 155% and that GDP will drop around 4% this year. It is important to mention that interest rates have fallen quicker than expected, and it is anticipated that these should drop further as inflation continues to decline. Now moving into business dynamics. As you can see on Slide 3 of our webcast presentation, our service offering has evolved such that by the end of March 2024, retail digital clients' penetration reached 62%, while retail mobile clients reached 58%. The response from customers has been satisfactory, and we are convinced this is the path to pursue in our aim to sustain and expand our competitive position in the financial system. Retail digital sales measured in units reached 93.6% in the first quarter of 2024 and represent 73.6% of the Bank's total sales measured in monetary value. New customer acquisitions through the digital panel reached 81% in the first quarter of 2024, up from 76% in the first quarter of 2023. The Bank actively monitors its business, financial conditions, and operating results with the aim of maintaining a competitive position to face contractual challenges. Moving to Slide 4, I will now comment on the Bank's first-quarter 2024 financial results. BBVA Argentina's inflation-adjusted net income in the first quarter of 2024 was ARS34.2 billion, falling 41% compared to the net income in the fourth quarter of 2023. This implied a quarterly ROE of 6.6% and a quarterly ROA of 1.6%. Quarterly operating income in the first quarter of 2024 was ARS631.2 billion, 13% lower than in the fourth quarter of 2023. Quarterly operating results are mainly explained by a lower operating income due to lower income from foreign exchange and gold gains, particularly in contrast with the fourth quarter 2023’s extraordinary results, which were impacted by the devaluation of the Argentine peso versus the US dollar. This was offset by better results from income from the measurement of financial instruments at fair value to P&L, also in contrast with the results in the fourth quarter of 2023, where a loss was reported due to the dual bonds valuation; better net income from the write-down of assets at amortized costs and at fair value through OCI, mainly due to the sale of inflation-linked bonds; and lower personal benefits and other operating expenses. Net income for the period was highly impacted by income from the net monetary position despite inflation being slightly lower in the first quarter of 2024 than in the fourth quarter of 2023; the increase in the monetary position in the first quarter of 2024 versus fourth quarter of 2023 more than proportionally offset the decrease in inflation. That increment was impacted by a higher value of public securities in the fourth quarter of 2023, especially under the fair value through OCI valuation criteria. Turning into the P&L lines in Slide 5. Net interest income for the first quarter of 2024 was ARS787.8 billion, increasing 4.8% quarter-over-quarter. In the first quarter of 2024, interest income decreased less than interest expenses in monetary terms, the former due to lower income from public securities and the latter due to lower expenses on time deposits and investment accounts. The quarterly decrease in interest income is mainly driven by lower income from government securities explained by the termination of the issuance of LELIQ by the Central Bank in December 2023, reducing its volume on year-end; and lower income from loans, mainly discounted instruments, credit cards, and other loans, the latter affected by the fall in floor planning. This was partially offset by better income from REPO at lower rates than accrued by LELIQ and income from inflation-linked bonds. On the other hand, interest expenses decreased 16% due to lower time deposits and events and account expenses, lower volume, and the deregulation of the minimum rate by the end of the quarter. Interest on time deposits, including investment accounts, explained 47% of interest expenses compared to 71.2% of the previous quarter. Net income as of the first quarter of 2024 totaled ARS50.5 billion, falling 6.4% quarter-over-quarter. In the first quarter of 2024, fee income totaled ARS91.1 billion, declining 15.1% quarter-over-quarter. In spite of the general quarterly decline across all lines, the decrease is mainly explained by fees from credit cards, which fell 17.3%, and fees linked to liabilities, which decreased 14.4%. Regarding the former, aside from being impacted by expenses related to the Puntos BBVA loyalty program, it was also affected by a decrease in activity and consumption. Fees linked to liabilities increased, but the rise in fees from account maintenance and bundles did not compensate for the decline in activity. Fee expenses totaled ARS40.6 billion, down 23.9% quarter-over-quarter. Lower expenses are explained by reduced activity and the contrast with high seasonal fee expenses in the fourth quarter of 2023. Additionally, there was a decrease in fees linked to payroll marketing campaigns. In the first quarter of 2024, loan loss allowances decreased by 14.3%, explained by the good performance of the loan portfolio. During the first quarter of 2024, total operating expenses were ARS209.6 billion, decreasing 3.5% quarter-over-quarter, with 29% being personal benefits costs. Personal benefits decreased by 11.2% quarter-over-quarter. The quarterly change is mainly explained by the contrast with the inflation adjustment of vacation stock provisions and variable compensations recorded in the fourth quarter of 2023, plus wage negotiations with the unions that match inflation during the first quarter of 2024. As of the first quarter of 2024, administrative expenses grew 33.1% quarter-over-quarter. This is mainly explained by an increase in the price of foreign currency services contracted with the parent company. The quarterly efficiency ratio as of the first quarter of 2024 was 65.4%, above the 46.4% reported in the fourth quarter of 2023. The quarterly increase is explained by a rise in expenses contrasted with a decrease in income, especially due to lower interest income and the impact of inflation on the monetary position. In terms of activity, on Slide 6, private sector loans as of the first quarter of 2024 totaled ARS2.7 trillion, decreasing 12.7%. Loans to the private sector in pesos fell 16.2% in the first quarter of 2024. During the quarter, the decrease was especially driven by lower generalized seasonality in practically all products. The decrease was partially offset by a 20.9% increase in overdrafts, mostly due to their short duration. Loans to the private sector denominated in foreign currency increased 18.4%, explained by a 26% growth in financing and pre-financing of exports. Loans to the private sector in foreign currency measured in US dollars increased 69.3% quarter-over-quarter. During the quarter, the retail portfolio fell 16.2%, and the commercial portfolio decreased 9.4%. As observed in previous quarters, the loan portfolio was impacted by the effect of inflation in the first quarter of 2024, which reached 61.6%. In nominal terms, BBVA Argentina managed to increase the retail, commercial, and total loan portfolio by 27.1%, 37.4%, and 32.1%, respectively, during the quarter, all surpassing quarterly inflation levels. BBVA Argentina's consolidated market share of private sector loans reached 10.08% as of the first quarter of 2024, improving from 9.33% a year ago and surpassing the double-digit figure. As of the first quarter of 2024, the asset quality ratio maintains very good performance at 1.23%, in line with the healthy behavior of the commercial portfolio. On the retail portfolio, there is a slight increase in the NPL portfolio due to credit cards, but with no significant impact on the NPL ratio. On the funding side, as seen on Slide 7, private non-financial sector deposits in the first quarter of 2024 totaled ARS4.6 trillion, falling 15.6%. The Bank's consolidated market share of private deposits reached 7.37% as of the first quarter of 2024. Private non-financial sector deposits in pesos totaled ARS3.2 trillion, decreasing 9.3% compared to the fourth quarter of 2023. The quarterly change is mainly affected by a 21.2% decline in saving accounts and an 8% fall in checking accounts, especially non-interest bearing checking accounts. Private non-financial sector deposits in foreign currency expressed in pesos fell 27.3% quarter-over-quarter, mainly explained by seasonal factors in the fourth quarter of 2023. In terms of capitalization, BBVA Argentina continues to show strong solvency indicators as of the first quarter of 2024. The capital ratio reached 35.6%. Growth in the ratio was mainly driven by a fall in risk-weighted assets. Exposure to the public sector in the first quarter of 2024, excluding Central Bank instruments, represented 13.9% of total assets, down from 15.9% in the fourth quarter of 2023. The last ratio reported by the system was 26.5% as of February 2024. The Bank's total liquidity ratio remained healthy at 92% of total deposits as of March 31, 2024. Last but not least, as of the date of this report, the Bank has announced the payment of dividends in three installments in cash or card. The total amount due will be ARS264.2 billion inflation adjusted as of December 31, 2023. This concludes our prepared remarks. We will now take your questions. Operator, please open the line for questions.

Our first question is from Carlos Gomez with HSBC.

I would like to know if you can explain slowly why the net interest income declined so much in your case compared to your peer banks in Argentina this quarter. I was not able to follow it closely.

Basically, one of the main factors that affect our net income this quarter is the different valuation model the banks have to value securities in the P&L. We believe the portfolio strategy should be analyzed based not only on one quarter, but over more quarters. Now, being that said, our valuation criteria for securities compared to peers has more negatively impacted our P&L in the first quarter. This is particularly because of the extraordinary results we reported in the previous quarter. Remember that last year, our equity grew 25% in real terms. Now why net income is very affected by this fact, is that in the past, because of that extraordinary result, my equity grew much more than probably the peers, which did not recognize those valuations in equity. That generates a higher loss due to inflation adjustment, and that's why we are seeing a more significant negative effect in the P&L. So it's quite different to compare banks with different models. If you would make a proxy, for example, if we used the model of cost instead of fair value, you should analyze our figures by discounting from the equity around ARS260 million. To that, you would need to apply the approximately 52% inflation we had in the quarter. If you do your math, the ROE would be around the early 20s. So basically, the problem is the comparisons between the two models. Our model probably is a little more transparent because we reflect not only the gain from the securities but also the valuation of those securities and the effect of inflation in the P&L every quarter. Under the cost model, you don’t reflect that valuation; therefore, your equity doesn't grow that much, so you do not record that extra loss affected by inflation. Under the trading model, it is probably comparable, but it's a different way of managing a portfolio. They are more short-term based, and it's another way of managing your securities. The model we use—this is the same model that BBVA as a holding uses—is meant to protect the assets. That's why we have this model that shows results on P&L and valuation on the OCA line. So basically, that is a key factor that affected our net income. I was also mentioning, despite expenses decreasing quarter-over-quarter, we had administrative expenses that grew, mainly tied to FX, which are mainly costs related to the parent company. So that also affected our results. I don't know if that answers your question.

On the valuation at cost, do you have a significant gain in the OCI line from last year or last quarter, in particular? And that doesn't impact the income statement now because it's already reflected in your results?

The fact is that your equity when you start the first quarter of this year is much higher. And the line of inflation adjustments recognized is the loss for your equity exposure to inflation. As my equity was so large because we recognized the valuation of securities, we have a higher loss due to inflation because our monetary assets—the monetary assets and securities are at the value of the securities. In the amortized—under the other model, you don't recognize that valuation in the P&L. You only recognize it when you go selling or when you get the—selling the bond, correct? So by not recognizing that higher value of securities, your equity is lower, and consequently, your inflation exposure is less. That's why it's not comparable. So when you compare P&Ls, you need to compare figures but also different business models.

Now this was this particular quarter. So how does that reflect into the rest of the year when inflation should be lower and rates were also below?

Going forward, we still believe we can—despite this quarter, we have a lower ROE. Our strategy regarding our securities, basically, as you know, lending no longer exists. Most of our liquidity has first gone to repos and it's already placed in the GAAP from our security portfolio. We have more or less 24% of our portfolio in CPI bonds and 67% in LECAP. We have 9% in bond pay as well. So moving forward, we are changing the yield as we turn to a fixed rate, which is LECAP. We still believe we can sustain a mid-teens ROE for 2024. Also, we are seeing an increase in demand; we’re starting to see—according to our research department, loan growth for the systems should grow positively this year, around 22%. We are starting to see a higher increase in commercial lending, which is part of the strategy of the Bank. That should reflect in the results of the Bank, always intending to gain market share.

Showing no further questions. This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mrs. 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. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.