BBVA(BBAR) - 2018 Q4 - Annual Report

PART I Key Information The company reported a Ps. 1.49 billion net loss in 2018, reversing prior year's profit, driven by hyperinflationary losses and increased income tax expense Selected Financial Data Consolidated Statement of Profit or Loss (in thousands of pesos) | Indicator | For the year ended Dec 31, 2018 (in thousands of pesos) | For the year ended Dec 31, 2017 (in thousands of pesos) | | :--- | :--- | :--- | | NET INTEREST INCOME | 31,734,333 | 23,754,863 | | NET OPERATING INCOME | 2,449,144 | 2,243,690 | | PROFIT BEFORE TAX | 2,766,667 | 2,582,003 | | (LOSS) PROFIT FOR THE YEAR | (1,569,703) | 1,859,511 | | Attributable to owners of the Bank | (1,489,732) | 1,903,820 | | (Loss) Profit per ordinary share | (2.43) | 3.34 | | (Loss) Profit per ADS | (7.29) | 10.02 | Consolidated Statement of Financial Position (in thousands of pesos) | Indicator | As of Dec 31, 2018 (in thousands of pesos) | As of Dec 31, 2017 (in thousands of pesos) | | :--- | :--- | :--- | | TOTAL ASSETS | 361,542,449 | 318,783,092 | | Financial assets at amortized cost | 203,541,121 | 201,776,086 | | TOTAL LIABILITIES | 316,000,308 | 269,266,437 | | Financial liabilities at amortized cost | 293,240,299 | 249,393,674 | | TOTAL EQUITY | 45,542,141 | 49,516,655 | Selected Ratios | Ratio | As of Dec 31, 2018 | As of Dec 31, 2017 | | :--- | :--- | :--- | | Return on average total assets | (0.44)% | 0.63% | | Return on average total equity | (3.15)% | 4.37% | | Total equity as a percentage of total assets | 12.60% | 15.53% | | Non-performing loans as a percentage of gross loans | 1.80% | 0.65% | - The Argentine peso devalued 101.38% against the US dollar in 2018, with the exchange rate moving from 18.7742 to 37.8083 pesos per dollar, and the inflation rate for the same period was 47.65%[21] Risk Factors - The company's business is significantly affected by the macroeconomic and political instability in Argentina, characterized by periods of low growth, high inflation (47.6% in 2018), and currency devaluation, leading to significant capital outflows and IMF support in 2018[22][23] - The short-term structure of the Argentine financial system's deposit base, which is mostly transactional, poses a liquidity risk and limits long-term credit expansion, with volatility in U.S. dollar deposits observed during the 2018 currency crisis[30] - The company faces increasing competition from non-bank entities such as payment platforms, e-commerce businesses, and large digital players (e.g., Google, Facebook, Apple) that have started offering financial services, creating an uneven regulatory playing field[32] - Management concluded that as of December 31, 2018, the company did not maintain effective internal control over financial reporting due to material weaknesses related to the determination of loan losses under IFRS 9 and the completeness and accuracy of certain IFRS financial statement disclosures[44][525] Information on the Company BBVA Francés, Argentina's third-largest private bank, offers universal banking services, driven by digital transformation, and is a BBVA Group subsidiary History and development of the company - BBVA Francés was incorporated on October 14, 1886, with BBVA becoming the principal shareholder in December 1996, reaffirming its universal banking strategy[58] - In 2017, the bank completed a share capital increase, offering 75,781,788 new ordinary shares to support its growth strategy[61] - In February 2019, the bank, along with other shareholders, sold a 51% stake in Prisma Medios de Pago S.A. to an affiliate of Advent International Corporation as part of a divestment commitment[61] - The bank completed its move to the new "BBVA Tower" headquarters in April 2017, a project designed to unify core areas and meet high sustainability standards (LEED Gold Certification)[62][63] Business Overview - BBVA Francés is the third-largest private bank in Argentina by total loans, with an 8.6% market share as of December 31, 2018, serving approximately 2.5 million active retail clients[64][65] - The bank's strategy is centered on transformation and growth, with 46.4% of products sold through digital platforms and 59.4% of retail clients engaging in digital transactions in 2018[68][70] Loan and Deposit Portfolio by Business Line (in thousands of pesos) | Business Line | Loans (Dec 31, 2018, in thousands of pesos) | Loans (Dec 31, 2017, in thousands of pesos) | Deposits (Dec 31, 2018, in thousands of pesos) | Deposits (Dec 31, 2017, in thousands of pesos) | | :--- | :--- | :--- | :--- | :--- | | Retail Banking | 76,943,205 | 80,460,210 | 180,600,946 | 161,241,437 | | Small & Medium-sized Companies | 52,444,965 | 63,454,009 | 49,240,049 | 46,547,108 | | Corporate & Investment Banking | 52,196,585 | 45,101,039 | 29,668,066 | 19,489,209 | | Total | 181,584,755 | 189,015,258 | 259,509,061 | 227,277,754 | - The bank's distribution network as of December 31, 2018, includes 252 branches, 834 ATMs, and 844 self-service terminals, complemented by a strong digital presence and strategic alliances[67] Organizational Structure - As of December 31, 2018, Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) is the controlling shareholder, owning 66.55% of the bank's capital stock[101] Key Subsidiaries and Joint Ventures (as of Dec 31, 2018) | Entity | Type | BBVA Francés Ownership | Principal Activity | Stockholders' Equity (millions of Ps.) | | :--- | :--- | :--- | :--- | :--- | | BBVA Francés Asset Management S.A. | Subsidiary | 95.00% | Investment fund manager | 449.2 | | BBVA Francés Valores S.A. | Subsidiary | 97.00% | Stock exchange brokerage | 169.4 | | Volkswagen Financial Services S.A. | Joint Venture | 51.00% | Financial institution | 1,241.9 | | PSA Finance Argentina Cía. Financiera S.A. | Joint Venture | 50.00% | Financial institution | 869.0 | | Rombo Compañía Financiera S.A. | Joint Venture | 40.00% | Financial institution | 1,286.9 | - On September 25, 2018, BBVA Francés lost control over Volkswagen Financial Services Compañía Financiera S.A. (VWFS), which was subsequently deconsolidated and classified as a joint venture[8][59] Property, Plants and Equipment - As of December 31, 2018, the bank's network consisted of 252 retail branches, with 112 owned and 140 leased properties[117] - The bank's principal executive offices are located at Av. Córdoba 111, Buenos Aires, Argentina, in an owned property of approximately 30,517 square meters[117] Selected Statistical Information Average Balance Sheet Summary (in thousands of pesos) | Item | 2018 (in thousands of pesos) | 2017 (in thousands of pesos) | | :--- | :--- | :--- | | Total interest-earning assets | 234,010,729 | 200,811,555 | | Average real rate | 24.13% | 17.78% | | Total interest-bearing liabilities | 197,406,350 | 154,183,901 | | Average real rate | 12.53% | 7.76% | | TOTAL ASSETS | 331,130,753 | 297,072,421 | Loan Portfolio by Economic Activity (as of Dec 31, in thousands of pesos) | Economic Activity | 2018 Loan Portfolio (in thousands of pesos) | % of Total | 2017 Loan Portfolio (in thousands of pesos) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Consumer | 61,518,019 | 33.13% | 88,070,584 | 45.92% | | Other manufacturing | 26,107,936 | 14.06% | 20,112,359 | 10.49% | | Mining products | 20,247,476 | 10.90% | 1,129,881 | 0.59% | | Wholesale and retail trade | 18,167,505 | 9.78% | 17,915,847 | 9.34% | | Others | 16,604,074 | 8.94% | 46,818,135 | 24.41% | | Total | 185,682,306 | 100.00% | 191,774,986 | 100.00% | Loan Portfolio Classification by Stage | Stage | 2018 (in thousands of pesos) | % of Total | 2017 (in thousands of pesos) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Stage 1 | 169,108,709 | 91.07% | 189,596,035 | 98.86% | | Stage 2 | 12,820,114 | 6.90% | 849,653 | 0.44% | | Stage 3 (Non-performing) | 3,753,483 | 2.03% | 1,329,298 | 0.70% | | Total | 185,682,306 | 100.00% | 191,774,986 | 100.00% | Analysis of Allowance for Loan Losses (in thousands of pesos) | Item | Year ended Dec 31, 2018 (in thousands of pesos) | Year ended Dec 31, 2017 (in thousands of pesos) | | :--- | :--- | :--- | | Balance at beginning of year | 2,767,041 | 1,317,015 | | Adoption IFRS 9 | 1,036,297 | - | | Provisions for loan losses | 3,871,311 | 2,749,775 | | Charge-offs | (2,805,207) | (1,299,749) | | Balance at end of year | 4,869,442 | 2,767,041 | The Argentine Banking System and its Regulatory Framework - The Argentine banking system is regulated by the Central Bank (BCRA), which establishes technical ratios, capital requirements, and supervises 53 commercial banks as of December 31, 2018[163][165] - Capital adequacy requirements are based on Basel III principles, mandating minimum ratios for common equity (4.5%), Tier 1 capital (6%), and total capital (8%) of risk-weighted assets, plus a 2.5% capital conservation buffer[189][190] - The Central Bank requires financial institutions to maintain minimum cash reserves against deposits, with 45% for demand deposits in pesos and 35% for short-term time deposits (up to 29 days) as of January 2019[176][180] - The Deposit Guarantee System covers deposits up to Ps. 450,000 per person per deposit, increased to Ps. 1,000,000 effective March 1, 2019[257][259] Cybersecurity and Fraud Management - The bank's cybersecurity is managed by the BBVA Group's Corporate Security & Engineering Risk (CS&ER) Operations team, including a Global Computer Emergency Response Team (CERT) providing 24/7 detection and response[265] - In 2018, the bank expanded chip card use, renewed its ATM network for compatibility, and added biometric data readers in branches to strengthen security and reduce fraud[265] - The BBVA Group has a Corporate Fraud Committee that oversees fraud evolution, monitors risks and mitigation plans, and evaluates business and customer impact across all operating countries[265] Operating and Financial Review and Prospects In 2018, the bank reported a Ps. 1.49 billion net loss, reversing prior year's profit, due to hyperinflationary losses and increased taxes amid a challenging Argentine economy Operating Results Consolidated Profit or Loss Summary (in thousands of pesos) | Item | FY 2018 (in thousands of pesos) | FY 2017 (in thousands of pesos) | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | 31,734,333 | 23,754,863 | 33.6% | | Net Operating Income | 2,449,144 | 2,243,690 | 9.2% | | Loss on net monetary position | (11,654,234) | (6,159,779) | 89.2% | | Income tax expense | (4,336,370) | (722,492) | 500.2% | | (Loss) Profit for the Year | (1,569,703) | 1,859,511 | (184.4)% | - Net Interest Income increased by 33.6% to Ps. 31.7 billion in 2018, driven by a sharp rise in interest rates that positively affected spreads, as more than half of liabilities are in non-interest-bearing accounts[309][310] - Impairment of financial assets increased by 51.7% to Ps. 3.8 billion in 2018, reflecting deteriorating economic conditions, with the non-performing loan ratio rising to 1.8% from 0.7% in 2017[328] - The application of IAS 29 for hyperinflationary economies resulted in a Ps. 11.7 billion loss on the net monetary position in 2018, compared to a Ps. 6.2 billion loss in 2017[329] Liquidity and Capital Resources - The bank's ratio of liquid assets to total deposits increased to 36.7% at year-end 2018 from 26.4% at year-end 2017, indicating a strong liquidity position[340] - As of December 31, 2018, the bank had consolidated excess capital of Ps. 14.7 billion pursuant to Central Bank rules, up from Ps. 11.7 billion in 2017[348] Capital Ratios (Central Bank Rules) | Ratio | As of Dec 31, 2018 (in millions of pesos) | As of Dec 31, 2017 (in millions of pesos) | | :--- | :--- | :--- | | Total capital | 36,478.8 | 27,309.7 | | Required minimum capital | 21,791.4 | 15,653.8 | | Excess capital | 14,687.4 | 11,655.9 | Trend Information - Argentina's economy deteriorated in 2018, with GDP falling 2.5% and inflation rising to 47.6%, driven by internal and external pressures, leading to high volatility and an IMF assistance package[357] - The Argentine financial system remains under-penetrated compared to Latin American peers, suggesting significant growth potential if macroeconomic conditions normalize, and is fragmented, presenting consolidation opportunities[357] - For 2019, the bank plans to focus on its transformation strategy, combining digital and cultural changes to improve productivity and client service, despite a projected further GDP contraction of 1.2%[359] Directors, Senior Management and Employees The bank is managed by a Board of Directors and senior management, supported by various committees, with 6,089 employees and satisfactory union relations Directors and Senior Management - The Board of Directors consists of a minimum of three and a maximum of nine directors, elected for three-year terms, with Jorge Carlos Bledel serving as Chairman as of the report date[366][369] - The senior management team is led by Martín Ezequiel Zarich, the Chief Executive Officer, who has been with the bank since 1987 and was appointed to his current role in 2015[389][381][382] Compensation - The aggregate compensation paid to all directors and officers during the fiscal year ended December 31, 2018, was Ps. 185.8 million, which includes amounts accrued in 2017 but paid in 2018[396] - The bank has a Nomination and Remunerations Committee, comprised of non-executive directors (majority independent), which assists the Board in setting compensation policies and benefits[396] Board Practices - The bank's corporate governance includes a Supervisory Committee responsible for monitoring management's compliance with laws and shareholder resolutions[398] - The bank has established several specialized committees to oversee key areas, including two Audit Committees, a Nomination and Remunerations Committee, a Risk Management Committee, and a Disclosure Committee[401][402][403][409] Employees Number of Full-Time Employees | Location | As of Dec 31, 2018 | As of Dec 31, 2017 | | :--- | :--- | :--- | | Main office | 3,568 | 3,480 | | Branches | 2,521 | 2,602 | | Total | 6,089 | 6,082 | - As of December 31, 2018, 2,547 employees were members of the national bank union, and the bank considers its relations with employees satisfactory, with no conflicts for over 20 years[417] Major Shareholders and Related Party Transactions BBVA and its subsidiary held a controlling 66.1% stake as of March 31, 2019, with other major shareholders including The Bank of New York Mellon and ANSES Major Shareholders Beneficial Ownership as of March 31, 2019 | Beneficial Owner | Number of Shares | Percentage of Shares Outstanding | | :--- | :--- | :--- | | Banco Bilbao Vizcaya Argentaria S.A. | 244,870,968 | 39.97% | | BBV América SL (controlled by BBVA) | 160,060,144 | 26.13% | | The Bank of New York Mellon (as ADS holder) | 126,481,611 | 20.64% | | Administración Nacional de Seguridad Social | 42,439,494 | 6.93% | Related Party Transactions - The bank conducts transactions with related parties, including its parent company BBVA, subsidiaries, and joint ventures, in the ordinary course of business on arm's-length terms[424][431] Outstanding Amounts with Key Related Parties (as of Dec 31, 2018) | Related Party | Amount Outstanding (in thousands of pesos) | Nature of Transactions | | :--- | :--- | :--- | | BBVA and subsidiaries | 1,292,644 | Guarantees given and correspondents | | Volkswagen Financial Services S.A | 4,589,088 | Credit card loans, other loans, call money, advances and equity investment | | Rombo Cia Financiera S.A. | 2,165,637 | Call money, other loans, guarantees given and equity investment | | PSA Finance S.A. | 669,742 | Call money, advances, other loans, guarantees given and equity investment | Financial Information The bank's dividend payments are subject to Central Bank regulations and capital requirements, and it faces various legal and regulatory proceedings with uncertain outcomes - The bank is involved in a number of legal and regulatory actions and proceedings, the outcomes of which are uncertain and could have a material adverse effect on its financial position[435] - Dividend distributions are subject to Central Bank regulations and require the bank to meet minimum capital and liquidity requirements; for FY 2018, the Board proposed a cash dividend of Ps. 2.41 billion[436][438] The Offer and Listing The company's ordinary shares are listed on BYMA ('FRAN') and its ADSs on NYSE ('BFR'), with significant price volatility observed in 2018 ADS Price on NYSE (US$) | Period | High (US$) | Low (US$) | | :--- | :--- | :--- | | Year ended Dec 31, 2018 | 26.60 | 7.18 | | Year ended Dec 31, 2017 | 25.54 | 15.30 | | Year ended Dec 31, 2016 | 23.10 | 16.50 | Ordinary Share Price on BYMA (Pesos) | Period | High (Pesos) | Low (Pesos) | | :--- | :--- | :--- | | Year ended Dec 31, 2018 | 170.50 | 89.00 | | Year ended Dec 31, 2017 | 157.00 | 87.00 | | Year ended Dec 31, 2016 | 119.00 | 78.50 | Additional Information This section covers the bank's by-laws, material contracts, Argentine exchange controls (eased in 2015), and tax implications for U.S. holders Memorandum and Articles of Association - The company's object is to engage in commercial banking in Argentina and abroad, with authorized activities including deposits, loans, guarantees, and foreign exchange transactions[453] - Director compensation is determined annually by shareholders, subject to a cap of 25% of the bank's income (or 5% if no dividends are distributed), as per Section 261 of the Business Companies Law[455] Exchange Controls - Argentina's restrictive exchange controls were substantially eased starting in December 2015, with the mandatory deposit on capital inflows reduced to zero and the waiting period for capital repatriation eliminated[463] - As of July 1, 2017, through Communication "A" 6244, the Central Bank significantly modified and made more flexible the rules governing the foreign exchange market, establishing the principle of a single free market[468] - In November 2017, the obligation for exporters to repatriate foreign currency proceeds from the export of goods was eliminated[463][469] Taxation - For fiscal years starting January 1, 2018, dividends paid by the company are subject to a 7% withholding tax, scheduled to increase to 13% for fiscal years beginning in 2020[471] - Capital gains from the sale of ADSs by non-resident beneficiaries are exempt from Argentine tax, provided the beneficiary does not reside in a non-cooperating jurisdiction[473] - For U.S. Holders, distributions are generally treated as dividends for U.S. federal income tax purposes, potentially taxed at favorable rates for certain non-corporate U.S. Holders[478] Quantitative and Qualitative Disclosures About Market Risk The bank employs a comprehensive risk management framework, overseen by the Board, to mitigate credit, financial, and operational risks, using VaR as a primary market risk metric - The bank's risk management framework is based on principles of caution and anticipation, with independent oversight from the Risks Management area, covering credit, financial, and operational risks[487][489] - The bank's risk appetite, approved by the Board of Directors, aims for a moderate risk profile to ensure a solid financial position, prudent management, and portfolio diversification[490] Daily Trading VaR (in millions of pesos) | VaR Metric | 2018 (in millions of pesos) | 2017 (in millions of pesos) | | :--- | :--- | :--- | | Average | 22.86 | 48.39 | | Minimum | 4.97 | 10.29 | | Maximum | 97.37 | 85.04 | | At December 31 | 49.36 | 43.33 | - As of December 31, 2018, the bank's net asset currency position was Ps. 4.89 billion, with a hypothetical 10% peso devaluation estimated to result in a Ps. 489 million negative effect on net income[347][519] PART II Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2018, due to material weaknesses in internal control over financial reporting, leading to an adverse audit opinion - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018, due to material weaknesses in internal control over financial reporting[524] - The material weaknesses identified relate to ineffective controls over the determination of loan losses under IFRS 9 and the completeness and accuracy of disclosures required by IFRS 9, IFRS 7, and IAS 29[525] - The independent registered public accounting firm, KPMG, issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[527][534] - A remediation plan is underway to address the weaknesses, focusing on strengthening personnel knowledge, enhancing control monitoring, improving model governance, and dedicating more resources to IFRS-IASB disclosures[528][530] Audit Committee Financial Expert The Board has appointed Mr. Oscar Miguel Castro as an audit committee financial expert, who also qualifies as an independent director under CNV criteria - The Board of Directors has determined that Mr. Oscar Miguel Castro is an audit committee financial expert serving on its Audit Committees (I and II) and the Disclosure Committee[538] Code of Ethics The bank has adopted a 'Code of Conduct' applicable to all management and employees, with no waivers granted in fiscal year 2018 - The bank has a "Code of Conduct" applicable to all employees and management, including the CEO and CFO, and no waivers were granted from its provisions during the 2018 fiscal year[539] Principal Accountant Fees and Services Total fees paid to KPMG, the independent auditor, increased to Ps. 45.31 million in 2018, primarily for audit services, with all non-audit services pre-approved Principal Accountant Fees (in millions of pesos) | Fee Type | 2018 (in millions of pesos) | 2017 (in millions of pesos) | | :--- | :--- | :--- | | Audit fees | 45.06 | 17.08 | | Audit-related fees | 0.25 | 4.60 | | Tax fees | — | — | | All other fees | — | — | | Total fees | 45.31 | 21.68 | Corporate Governance As a non-U.S. NYSE-listed company, BBVA Francés follows Argentine corporate governance, differing from NYSE standards in board independence and non-management director meetings - The company follows its home country (Argentine) corporate governance practices, which differ from NYSE standards, as permitted for non-U.S. listed companies[542] - A significant difference from NYSE standards is that the Board of Directors is not required to have a majority of independent directors; currently, the Board has two independent directors[545] - Unlike NYSE requirements, Argentine law does not mandate regularly scheduled executive meetings for non-management directors without management present[545] - The bank has an Audit Committee that complies with Argentine Law No. 26,831, with functions and responsibilities essentially the same as those under SEC Rule 10A-3[547][549] PART III Financial Statements The consolidated financial statements for 2018 and 2017 were prepared under IFRS-IASB, adjusted for hyperinflation, receiving an unqualified opinion on financials but an adverse opinion on internal controls - The financial statements for FY 2018 and 2017 were prepared in accordance with IFRS as issued by the IASB, marking the bank's first adoption of IFRS-IASB with a transition date of January 1, 2017[7][579] - Due to Argentina's hyperinflationary economy, the financial statements have been adjusted in accordance with IAS 29, stating all items in terms of the measuring unit current at December 31, 2018[9][599] - The bank adopted IFRS 9 "Financial Instruments" as of January 1, 2018, with comparative information for 2017 presented under the previous standard, IAS 39[580][595] - The independent auditor's report provides an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of internal control over financial reporting[561]