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Edited Transcript of FRAN.BA earnings conference call or presentation 24-Aug-18 3:30pm GMT

Q2 2018 BBVA Banco Frances SA Earnings Call

Buenos Aires Sep 19, 2018 (Thomson StreetEvents) -- Edited Transcript of BBVA Banco Frances SA earnings conference call or presentation Friday, August 24, 2018 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cecilia Acuña

BBVA Banco Francés S.A. - IR

* Diego Cesarini

BBVA Banco Francés S.A. - Financial and IR Manager

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Conference Call Participants

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* Carlos Gomez-Lopez

HSBC, Research Division - Senior Analyst, Latin America Financials

* Frederic De Mariz

UBS Investment Bank, Research Division - Executive Director and LatAm Analyst for Non-Bank Financials and Banks

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Ricardo Alonso Garcia

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Francés' Second Quarter 2018 Results Conference Call. We would like to inform you that this event is being recorded. (Operator Instructions)

First of all, let me stress 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 Francés' annual report on Form 20-F for the fiscal year 2017 filed with the U.S. Securities and Exchange Commission.

Today with us, we have Mr. Ernesto Gallardo, CFO; Mr. Diego Cesarini, Finance and Investor Relations Manager; and Mrs. Cecilia Acuña, Head of Investor Relations. Mrs. Acuña, you may begin your conference.

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Cecilia Acuña, BBVA Banco Francés S.A. - IR [2]

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Thank you. Good morning, everyone. As usual, I will start with a brief summary on the most important topic of the second quarter of 2018, and then we'll be open to questions.

Now I'd like to make a brief review on the macroeconomic environment. The country suffered a contraction beginning in the second quarter of 2018 as a result of the drought occurred during the first months of the year and the sudden depreciation of the peso that resulted in higher interest rate and higher inflation than expected. Such increase in rates, the higher financial uncertainty and the increase in cash reserve requirements implemented by the Central Bank [even 100] basis points have contributed to a slowdown in the pace of growth of the financial intermediation activity with the private sector in real terms.

It should be noted that in this environment, banking deposits maintained a good performance, although slowing down the pace of growth and that the financial system continue with solid levels of liquidity and solvency.

I'd like to make a brief review on the bank performance. First of all, I like to remind you that since January 1, 2018, figures are reported in accordance with IFRS. Having said this, in the second quarter of 2018, BBVA Francés reached a net income of ARS 2.1 billion, 37.4% and 112.9% higher than the net income registered in the previous quarter and in the second quarter of 2017. In the last case, restated for comparative purposes.

During the second quarter of 2018, the ROE reached 3.5% and the ROA, 26.4% compared to 2.9% and 20.3% published in the previous quarter, respectively.

Net operating income reached ARS 8.2 billion, increasing 16.1% compared to the previous quarter, driven by higher net interest income, fee and foreign exchange result, [thus, inflating our] portfolio activity.

Operating expenses reached ARS 5.2 billion, an increase of 8.7% compared to the previous quarter, consequence of higher administrative expenses we grew as a result of the rise of [participation of cash of the 5.3%] mainly during the [4 months] of the consequence of the FX volatility. Personnel expenses decreased by 1.4% during the same period.

The efficiency ratio in the quarter reached 49.4%, showing an improvement of around 700 basis points compared to the previous quarter.

In connection to the activity level, at the end of June 2018, the private sector loan portfolio totaled ARS 162.1 billion, increasing 16.3% during the quarter and 82.6% (sic -- see slide 19 -- 82.5%) in the last 12 months.

Loan consolidated market share was 8.24%, showing an increase of 68 basis points in the last 12 months. Credit growth was affected during the second quarter by the devaluation of the peso and higher interest rate, resulting in a strong increase of loan in dollar, 40.2%, mainly due to the re-expression of the new value of the currency and mild growth in peso of 8.5%.

With regard to loans to individuals, credit card loans recorded a positive performance, offsetting the slowdown in demand for mortgages and personal loans. Commercial loans tended to moderate growth, and were focused on shorter terms. Although, as a result of the temporary closure of capital market, it was possible to see more interest from certain companies, especially larger financial companies over longer term.

As of June 30, 2018, the asset quality ratio was 0.86% with recovery ratio of 223%. The cost of risk reached 1.49%, 17 basis points above the last quarter due to some deterioration, mainly on the retail portfolio. The drought that affected the country during the first months of the year did not have a significant impact on the affected portfolio.

Total deposits reached ARS 192.9 billion at the end of June, increasing 20.6% compared to the previous quarter and 53.6% compared with the second quarter of 2017.

Foreign currency deposits remained stable during the quarter, but the balance reflects the depreciation of the peso. Local currency deposit increased 8.3%, mainly due to increases in saving accounts and current accounts with interest.

BBVA Francés continues to show an adequate level of solvencies. At the end of June, the total capital ratio was 14.6%, and the Tier 1 ratio was 13.4%.

Thank you very much. We are now ready to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Gabriel Nóbrega with Citibank.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [2]

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I have a question regarding your assets and the liability side. I just want to understand how fast are you able to reprice your own assets and your liabilities as well. Moreover, with the current increase in the reserve rate requirements [to 11%] and out of those, 6% that cannot be remunerated, how should we look at your margin going forward? And I'll make my second question after.

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [3]

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Gabriel, this is Diego Cesarini. Thank you for your question. Well, I will split the balance sheet in 2. First, in the dollar balance sheet, which represents approximately 25% to 30% of our total loans, well, we do not pay interest on the deposit side. So loans reprice approximately 1/5 or 1/6 of our portfolio every month. So it's a very short duration portfolio so it reprices very quick.

But I guess, that you are worried about our peso book. Regarding our peso book, our time deposit base, which is the one that reprices, and our remunerated current accounts, represent approximately 35% of our total book. And we hold approximately the same amount of money in short-term loans and [laleeks or lelacs]. So the speed of reprice on this is similar in the -- on assets and on liabilities.

What we have seen in the past 3 months is that the increase in loan rates have been, in general terms, more aggressive than on deposits. Just as an example, our deposit base, our time deposit base, has gone from a 21% rate to a 31% -- 30%, 31% right now. And our overdraft portfolio, our discount of documents or our [laleeks] or these kind of lines that are very short term, they have gone from levels of 26 or 28 to levels of 42 in case of documents or 50, 51 in case of overdraft.

The same happened, of course, with the LEBAC positions that have gone from 27% interest rate to 44% approximately. Looking at the future, of course, this reserve requirement increases that the Central Bank has been regulating during the last couple of months have an impact. And we have to (inaudible) keep some deposit costs as in the -- in our remunerated accounts as low as possible, but it depends, of course, on the market. So we have -- without that, we have some impact on these increases of reserve requirements.

Regarding our NIM, probably, our NIM had an impact on interest rate swaps in the second quarter. Probably, that will not be present in the third quarter. So my guess is that NIMs should go -- or they should be stable even with increase in reserve requirements, or they may fall a little but there will not be much damage comparing with the previous quarter.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [4]

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All right. That's very clear. And as for my second question, it's regarding your asset quality. What are you beginning to see in terms of [on trends]? We saw that during the quarter, your NPL ratio actually deteriorated 40%. I see that it's still the lowest NPL ratio among the other Argentine banks.

So I thought you could give us more colors on what you're seeing in terms of on trends. And as well, if I could ask, on your coverage ratio, we saw that it continues to be well above 200%. Do you maybe have a comfortable level? Do you expect maybe your coverage ratio to decrease over the coming quarters?

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [5]

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Okay. I will start by the second one. The coverage ratio has gone down from 250 approximately to 223, I guess. That is mainly because our NPL portfolio has grown. We went from 71 basis points to 87, and the coverage ratio going down, just a logical consequence of that calculation. Probably, it can go down a little more. I cannot tell you exactly where I think it will be by the end of the year. But probably, the trend will repeat.

Regarding asset quality in general terms, well, I would begin by saying that we are comfortable with our asset quality. We have always highlighted the good performance of our portfolio in the past. And I think that at this moment, even if you can see some deterioration, we keep being comfortable.

When we look at our provisions, we are still in the -- by the end of the -- this second quarter, we are still under our budget. So we were expecting at the beginning of the year some deterioration on this portfolio. And probably in the second semester, this process will continue, and we could figure out that we will land some maybe 10% above our estimate at the beginning of the year.

So our cost of risk that right now stands at 1.49%, I guess, we think that that could end around 1.6%, 1.60%, but it's not such a bad situation comparing with the environment.

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Operator [6]

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Our next question comes from Frederic De Mariz with UBS.

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Frederic De Mariz, UBS Investment Bank, Research Division - Executive Director and LatAm Analyst for Non-Bank Financials and Banks [7]

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A couple of questions. The first one is a follow-up on the previous question on asset quality. When you think of that increase from 1.49% in cost of risk to 1.6%, let's say, for the end of this year, it's really just a small increase, but where do you feel that the pressure on asset quality could come from?

Are you mostly focused on consumers because of inflation? Or is it mostly because of some corporates? And also in that theme of corporates, any sector that concerns you, maybe construction, maybe something else? That would be for asset quality.

And then my second question has to do with efficiency. You have one of the most successful and aggressive digital strategies. I just wanted to get an update on where you stand in the strategy and also what it means in terms of potential efficiency gains.

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [8]

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Okay. Well, thank you, Frederic. Well, starting with the risk issue, well, what we are seeing is some deterioration mainly on the retail side of the portfolio. This is basically credit card. We -- our trend may be -- the slope of our deterioration is clearly below the average of the market.

And even in -- after May, after the month of May, where some salary increases were seen across the industries, we saw some deceleration of this process. But even though, I think, we think that most margin will come from this retail portfolio in the coming quarters.

Regarding small companies, we have seen some small, some few cases with progress. But in general terms, nothing serious. We were worried at the beginning of the last quarter because of the severe drought that Argentina had suffered. But during July when we recover most of our agro loans, the things were normal. We got our credit -- agro credit cards repaid without any kind of problems. So still, we are not seeing nothing serious across the small companies' scope.

Regarding efficiency, well, we have closed a good quarter with slightly below 50. We were forecasting for the whole year an average in the low 50s. I think we are already on track on that, we will probably get those ratios.

You know the bank has been very prudent on costs during the last quarters. We have a strategy of not growing in branches. We have kept the same level of around 250 for the last year. And I think that that situation will continue.

We -- our digital strategy is working well. Every quarter, we see more people, more customers working on our web, on our cell phone application. And more products are sold on online instead of people going to the branches, which are now being more focused on adding value to customers. A lot of operations that were performed through physical human cashiers have been withdrawn, and now people are direct to the automatic tellers or whatever.

So I think that we will keep on that line. We have not suffered -- a very small portion of our costs are related to FX, so we didn't suffer the devaluation of the currency.

What we saw during the last quarter was increase in the costs of transportation of banking notes to the branches. That was mainly because the FX volatility and people demanding more bills, more dollars, but that has already subsided in the following months. So I think that things are going well in terms of efficiency for the bank, and we have the intention to keep lowering that ratio next year, of course.

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Operator [9]

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Our next question comes from Alonso Garcia with Crédit Suisse.

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Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [10]

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My question is regarding loan growth. My question is -- I mean, for how long do you see that current demand can be sustained in Argentina under this interest rate environment? And where could demand continue to come from in that same scenario?

And I mean, when -- do you expect. Of course, it's a difficult question, but when would you expect a more normalized situation in terms of interest rate to help further improvement in credit growth?

And regarding also the loan growth outlook, my question is, do you see the construction sector as an opportunity given the PPP project in Argentina? Or if you have a cautious stance given all the noise that is going on in the sector right now?

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [11]

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Well, thank you, Alonso. I start with the last one, and I hope I will remember the first one. Regarding loan connected to construction sector, we have a little -- very little exposure to that sector. It approximately is 1.5% of our total portfolio. So my first take here is we have not been very aggressive in the past. I think that this is not the best moment to start being more aggressive on that.

Regarding credit, well, we have seen some slowdown in the -- of course, in the second quarter, and that keeps -- the trend keeps and probably accelerated in the third quarter. The reason for that, the first reason, of course, is the raise in rates. As I mentioned before, most credit lines have increased the rate by 15 or 20 percentage points. So of course, that brings less demand from our customers.

The general environment, economical, political and financial, of course, helps for -- also for having less demand. And the third thing is that, well, central bank probably wants banks not to lend as much as they were lending. Because if not, we wouldn't have suffered 11 points of increase in results.

So I would say that right now, if most Argentinian banks wanted -- even if they wanted to and they had loan demand, they will feel some constraint on funding -- not on funding, but on these reserves issues.

So what I foresee is that with this new strategy by central bank of decreasing the scope of the banks sooner than we were all expecting, a strategy that personally we think is good, they will have more possibilities of decreasing rates in the coming months. Not probably in the coming 1, 2 or 3 months, but they will be more free to move rates down sooner than expected.

Probably, this means that inflation and the FX volatility should have been contained but by that moment, if not, probably we will -- we can expect rates to be kept at this level for some more months.

We still expect the bank to grow between 45% and 50% this year. Of course, a good part of this growth comes from devaluation of the currency. We are expecting peso loans to grow around 25% this year, and the rest, of course, comes from the dollar activity and the depreciation of the currency. And for next year, we are expecting for a progress in growth of around 35%.

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Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [12]

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35% next year?

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [13]

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Yes.

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Operator [14]

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(Operator Instructions) Our next question comes from Carlos Gomez with HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [15]

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Two questions, Diego. First one, you said you expect 35% loan growth next year. What do you expect inflation to be next year? And regarding this, what is the path of inflation in your projection. Now we understand it is particular to the projects right now. Second, any news on the Prisma sale?

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [16]

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Well, regarding inflation, Carlos, we are expecting for next year a level of 22%. So growth will be approximately 13 points in real terms. Similar to the growth we will have in this year, we are expecting a 33% [or 40%.] No, we don't have any news about Prisma sale. Really, I can't give you any color on that.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [17]

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And it was supposed to happen this year, right?

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Diego Cesarini, BBVA Banco Francés S.A. - Financial and IR Manager [18]

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Yes. I guess, it was supposed to be this year.

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Operator [19]

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So at this time, I'm showing no further questions, so I would like to turn the floor back to Mrs. Acuña for any closing remarks.

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Cecilia Acuña, BBVA Banco Francés S.A. - IR [20]

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Thanks again for joining us. And you have any further questions, please contact us in our offices.

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Operator [21]

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