Banco Bbva Argentina SA
NYSE:BBAR
Earnings Call Analysis
Q2-2023 Analysis
Banco Bbva Argentina SA
The current economic condition is characterized by a projected GDP decline of about 3.5% for the year, influenced by negative impacts on agricultural production and export due to adverse weather, as well as increased exchange rate restrictions and political uncertainty. This milieu has amplified the depreciation of the exchange rate and a surge in annual inflation, which hit 113.4% as of July 2023.
The company reported a strong quarterly return on equity (ROE) of 21.3% and a return on assets (ROA) of 3.9%, depicting robust profitability. Operating income saw an uptick of 28.6% quarter-over-quarter, reaching ARS125.3 billion for Q2 2023. The increase in operating income is attributed to improved interest income from public securities, higher net fee income, and gains from voluntary bond swaps. Nevertheless, the gains were somewhat offset by growing operating expenses.
Net interest income witnessed a striking increase of 14.2% from the previous quarter to ARS 195.5 billion in Q2 2023. This was fueled by augmented interest income, notably from public securities and repurchase agreements, and an increase in income from indexed loans, despite a parallel 27.1% hike in interest expenses associated with time deposit costs. The central bank's monetary policy rate increased across the quarter from 78% to 97%, which impacted interest income and expenses.
Net fee income jumped a remarkable 69.3% quarter-over-quarter in real terms, driven notably by higher credit card fees. Meanwhile, operating expenses climbed by 8.4%, largely due to inflation adjustments and a 25.8% increase in collective wages. Administrative expenses rose by 5%, primarily due to outsourced services and software expenses. Notwithstanding these escalations, the efficiency ratio improved to 42.8% in the second quarter from 62.4% in the prior period, hinting at enhanced operational performance.
Moving to lending dynamics, consumer loans decreased by 6.8%, but this downturn was counterbalanced by a 17.8% growth in discounted instruments and a 10.4% bump in other loans. Foreign currency denominated private sector loans grew by 12.1%, due mainly to a surge in export finance. The bank has also enhanced its market share of private sector loans to 9.01%, up from 8.35% from the prior year.
Regarding asset quality, the nonperforming loan ratio experienced a modest hike to 1.38%, which is an increase from the 1.31% in Q1 2023, largely due to a rise in retail portfolio nonperformance. On the funding side, private nonfinancial sector deposits went up to ARS2 trillion, marking a 3.5% quarter-over-quarter increment. This increase in deposits underscores the bank's strength in encompassing savings, checking accounts, and foreign investment accounts despite a slight fall in foreign currency deposits when expressed in pesos.
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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 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 [Operator Instructions]. 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 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 20-F for the fiscal year 2022 and filed with the US Securities and Exchange Commission.
Today with us, we have Ms. Carmen Arroyo, CFO; Ms. Inés Lanusse, IRO; and Ms. Belén Fourcade, Investor Relations. Ms. Fourcade, you may begin your conference.
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 Web site on the Financial Information section. Speaking during today's call will be Inés Lanusse, our Investor Relations Officer; and Carmen Mauricio 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.
Thank you, Belén. And thank you all for joining us today. As we are all aware, on Sunday, August 13th, 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 expected 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 the BBVA Research due to the impact of a negative weather shock on the production and export of agricultural goods coupled with increasing exchange rate restrictions and political uncertainty. In this context, it’s 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 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 weaker digital client 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 a 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 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 2020 financial results. BBVA Argentina second quarter 2020 net income was ARS30.4 billion, increasing 63.3% quarter-over-quarter. This implies a quarterly ROE of 21.3% and a quarterly ROA of 3.9%. Operating income in the second quarter of 2023 was ARS125.3 billion, 28.6% above the ARS97.5 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, boosted by greater turnover tax due to a higher [elite] 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 recession and inflation increase from 21.7% in the first quarter of 2023 to 23.8% in the second quarter of 2023.
Turning into the P&L lines in Slide 5 and 6 Net interest income for the second quarter of 2023 was ARS 195.5 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 share over adjustment driven by public securities with this adjustment; and two, a higher precision 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 totaled BRL 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 account, 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 fees from credit cards considering that this line includes Puntos BBVA loyalty program.
Regarding fee expenses, this totaled ARS9.6 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 ARS92.6 billion, increasing 8.4% quarter-over-quarter of which 31% were personnel benefit costs. Personnel 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, rate of 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 incomes and 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 7, private sector loans as of the second quarter of 2023 totaled ARS1.1 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 later post by floor plan. Loans to the private sector denominated in foreign currency increased 12.1%. Quarterly increase was mainly explained by a 13.9% growth in financing and prefinancing of exports. Loans to the private sector in foreign currency measured in US 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 23.8% 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 2021. The slight increase is mainly explained by an increase in the retail nonperforming portfolio.
On the funding side, as seen on Slide 8, private nonfinancial sector deposits in the second quarter of 2023 totaled ARS2 trillion, increasing 3.5% quarter-over-quarter. The bank's consolidated market share of private deposits reached 7.03% as of the second quarter of 2023. Private nonfinancial 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 saving accounts, which were partially pushed by exporters and agriculture producers’ deposits linked to the dollar dollar soja III program; two, a 14.8% increase in checking accounts; and three, foreign investment accounts by 18.9%, which offsets the growth in peso of funding. Private nonfinancial 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, represent 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 three of the six installments scheduled on dividend payments from the ARS50.4 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 Instructions] The first question comes from Carlos Gomez.
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?
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 and our research department is updating, for example, inflation, particularly on an everyday basis. We are already in levels through the end of the year around 175% to 200% monetary policy rate, 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 going to take place and how much it's going to be and at what -- basically to understand if interest rates will remain positive or negative, also projection for official USD is projected today in ASR700 per dollar at the year end. But again, macro variables are moving every day and this is tied also to the political uncertainty. 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%. And 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 [Ceron] 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. So it's a tough question to answer, because the macro variables are not clear enough for us to understand how the bank is going to 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.
So again, to summarize, at this point in time, meaning today, your inflation forecast is 175% and your monetary policy 135% ?
For the year-end, it's between 175% and 200% still not defined because was only 175%, but we know they're working on a higher probably inflation rate for the year-end. Monetary is still not defined, but probably around 138% can be a possibility. But again, it's not a fixed number. Numbers are changing on an everyday basis.
It's difficult to tell you the numbers today that may change tomorrow. What we know that we believe there is going to be an extra increase in monetary policy rates. It's not going to be remaining in 118% because we still see the FX increasing before the end of the year.
And again, this monetary policy rate, is that the monthly rates, which compounded gives you a number above 200%?
Yes, the inflation rate, yes. Year end 200%.
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 the second quarter. Again, is there any element of either seasonality or share pricing rates or share pricing inflation that has made the second quarter special, or is there something that we could project into the third or the fourth quarter?
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. And the other factor is the position in CER and LELIQ now from our public sector exposure to daily LELIQ represent 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 in control now, in the case of us, probably more controlled than other banks because of our parent company. So mainly the increase in NII and the good result has to do with that, with the increase of monetary portion rates and the position in public sector assets.
Next question comes from [Ludovic Kachot].
I've got two questions. The first one is about the impact of the devaluation of the official FX rate. On your results and on your book value, your equity, what would be the impact of devaluation of the FX official rate? And the second question is regarding the consolidation that we have seen in the market with Banco Macro buying out Itau Argentina. Would [indiscernible] they are interested in external growth, buying out local subsidiary of foreign bank or merging with a competitor, would you be interested in external growth?
I didn't understand the last part of your question, I understood [BMA] buying Itau, but the last part was?
The last part was, if you BBVA Argentina could be interested in buying a subsidiary of an international bank or to merge with another local bank?
Let me start by the last question. Regarding the Itau 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 franchises and 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 ramping stay quite stable. There's not much change by BMA acquiring Itau, but I believe it's a good acquisition for BMA strategy. Regarding us, again, it's a very unstable moment. So it's difficult to say what other M&A is going to take part. BBVA as a bank looks out of every opportunity and trying 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. Regarding [devaluation] that was the other part of your question, as you know, by recognization we have a cat 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 what we can do. Now there's not much we can do there, it's quite limitated what we can do regarding devaluation.
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.
Okay. Thank you for your time. And let us know you have further questions. Have a nice day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.