BBVA(US:BBAR)2021-04-14 16:00PART I Key Information This section presents selected financial data, key performance ratios, dividend history, and exchange rate information for Banco BBVA Argentina from 2017-2020, alongside a comprehensive overview of risk factors Selected Financial Data Consolidated Statement of Profit or Loss (in thousands of Argentine Pesos) | Indicator | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 77,050,867 | 90,244,852 | 66,460,642 | 49,749,382 | | Gross Income | 95,180,555 | 120,882,953 | 82,511,762 | 67,000,822 | | Profit Before Tax | 18,102,889 | 24,636,513 | 5,794,181 | 5,407,440 | | Profit (Loss) for the Year | 10,068,795 | 21,815,454 | (3,287,401) | 3,894,338 | | Profit (Loss) Attributable to Owners | 10,051,035 | 21,819,964 | (3,119,918) | 3,987,136 | | Profit (Loss) per Ordinary Share | 16.41 | 35.61 | (5.09) | 7.00 | Consolidated Statement of Financial Position (in thousands of Argentine Pesos) | Indicator | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | | Total Assets | 693,024,525 | 618,310,699 | 757,171,835 | 666,102,475 | | Total Liabilities | 578,481,131 | 503,493,790 | 661,793,752 | 563,919,848 | | Total Equity | 114,543,394 | 114,816,909 | 95,378,083 | 102,182,627 | Selected Ratios | Ratio | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | | Return on average total assets | 1.53% | 3.17% | (0.44)% | 1.19% | | Return on average total equity | 8.93% | 20.98% | (3.17)% | 7.88% | | Total equity as a percentage of total assets | 16.53% | 18.57% | 12.60% | 15.31% | | Non-performing loans ratio | 1.50% | 3.58% | 1.78% | 0.65% | - The Board of Directors proposed a cash dividend distribution of Ps. 7,000 million for the fiscal year 2020, subject to shareholder and BCRA approval, though the BCRA has restricted financial institutions from distributing dividends until at least June 30, 2021272930 Argentine Peso Devaluation and Inflation Rates (Year-end) | Year | Devaluation Rate | Exchange Rate (Ps. per US$) | Inflation Rate (CPI) | | :--- | :--- | :--- | :--- | | 2020 | 40.49% | 84.1450 | 36.14% | | 2019 | 58.42% | 59.8950 | 53.83% | | 2018 | 101.38% | 37.8083 | 47.65% | | 2017 | 18.45% | 18.7742 | 24.80% | | 2016 | 21.88% | 15.8502 | 34.59% | Risk Factors - The company identifies three main categories of risks: those relating to Argentina, risks concerning the Argentine financial system and the Bank itself, and legal, regulatory, and compliance risks3839 - The COVID-19 pandemic has significantly impacted the Argentine economy and the Bank's operations, leading to measures like temporary branch closures, a shift to remote work, and government-mandated borrower relief, which increased the risk of asset impairment and loan defaults105107109 - Argentina's economy is classified as hyperinflationary for accounting purposes under IAS 29, requiring financial statements to be restated to the current measuring unit at the end of the reporting period, which significantly affects data comparability and interpretation55180181 - The bank faces significant competition from non-bank entities like large technology firms (BigTech) and financial technology (Fintech) companies, which often operate under less stringent prudential regulations, creating an uneven playing field133134 - The bank's controlling shareholder, BBVA, owns 66.55% of the capital stock, giving it control over virtually all shareholder decisions, which may create conflicts of interest with minority shareholders167168 Information on the Company This section details the company's history, business operations, and organizational structure, including recent Argentine economic developments, the bank's business segments, its digitalization focus, and a review of the Argentine banking system's regulatory framework Recent Political and Economic Developments in Argentina Key Argentine Economic Indicators (2018-2020) | Indicator | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | GDP Growth | -9.9% | -2.2% | -2.5% | | Inflation (CPI) | 36.1% | 53.8% | 47.6% | | Unemployment Rate (Q4) | 11.0% | 8.9% | 9.2% (annual avg) | | Primary Fiscal Deficit (% of GDP) | 6.5% | 0.44% | 2.3% | | Trade Balance (US$ million) | 12,530 | 15,990 | (3,823) | - In 2020, the COVID-19 crisis exacerbated Argentina's existing economic challenges, leading to a 9.9% GDP contraction, with the government's increased public spending resulting in a primary fiscal deficit of 6.5% of GDP, largely financed by Central Bank monetary issuance250254265 - Argentina successfully restructured its sovereign debt with private creditors in August 2020, achieving 99% adherence and involving a significant coupon reduction from nearly 7% to 3% with extended maturities252 - The Central Bank implemented and tightened foreign exchange controls throughout 2019 and 2020 to manage reserve losses and currency depreciation, establishing a purchase limit of US$200 per month for individuals244246253 History and Development of the Company - Originally incorporated as Banco Francés del Río de la Plata S.A. on October 14, 1886, the bank changed its corporate name to Banco BBVA Argentina S.A. in 2019 and is supervised by the Central Bank of Argentina303304305 - In 2020, BBVA Argentina participated in the 'Play Sistémico' project with other major private banks to develop a digital payment solution, resulting in the incorporation of Play Digital S.A., in which the Bank holds a 10.762% interest309 Business Overview - BBVA Argentina is a subsidiary of Banco Bilbao Vizcaya Argentaria S.A. and is one of the leading private financial institutions in Argentina, offering retail and corporate banking services nationwide310 Key Financial and Market Position Data (as of Dec 31, 2020) | Metric | Value | | :--- | :--- | | Total Assets | Ps. 693.0 billion | | Total Loan Portfolio | Ps. 279.6 billion | | Total Deposits | Ps. 478.2 billion | | Total Shareholders' Equity | Ps. 114.5 billion | | Market Share (Private Loans) | 7.7% (unconsolidated) | | Market Share (Private Deposits) | 7.1% (unconsolidated) | - The bank operates through three main business lines: Retail Banking (2.69 million active clients), Small and Medium-sized Companies (SMEs) (over 52 thousand clients), and Corporate and Investment Banking (CIB) (over 700 clients)320 - The bank has a strong focus on digitalization, with active digital clients reaching 1.9 million as of December 31, 2020, representing a 71.7% penetration rate, and retail digital sales accounting for 80.8% of total unit sales in 2020327328 - The bank's distribution network as of December 31, 2020, includes 247 branches, 888 ATMs, and 857 self-service terminals, complemented by digital channels like bbva.com.ar, BBVA Móvil, Go, and the new MODO payment app321325 Organizational Structure - As of December 31, 2020, Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) is the controlling shareholder, owning 66.55% of the bank's capital stock411 Key Subsidiaries of BBVA Argentina (as of Dec 31, 2020) | Subsidiary | Ownership % | Principal Activity | | :--- | :--- | :--- | | PSA Finance Argentina Cía. Financiera S.A. | 50.00% | Financial institution | | BBVA Asset Management Argentina S.A. | 100.00% | Investment fund manager | | Volkswagen Financial Services S.A. | 51.00% | Financial institution | - The bank holds a 40% interest in the joint venture Rombo Compañía Financiera S.A. and has investments in associates including BBVA Consolidar Seguros S.A. (12.22%) and Play Digital S.A. (13.00%)452461 Property, Plant and Equipment - The bank's principal executive offices are located at Av. Córdoba 111, Buenos Aires, in a property owned by the company480 - As of December 31, 2020, the bank's network consisted of 247 retail branches, with 113 located in properties owned by the bank and 134 in leased properties481 Selected Statistical Information - The statistical information presented has been adjusted for hyperinflation in accordance with IAS 29, stating figures in the measuring unit current at December 31, 2020484 Net Interest Margin and Spread | Indicator | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Margin (Weighted Avg) | 21.82% | 19.67% | 13.56% | | Yield Spread (Weighted Avg) | 17.63% | 16.64% | 11.60% | Loan Portfolio Classification by Stage (as of Dec 31) | Stage | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Stage 1 | 84.74% | 86.51% | 91.07% | | Stage 2 | 13.40% | 9.72% | 6.90% | | Stage 3 (Non-performing) | 1.86% | 3.77% | 2.03% | Impairment Allowance Activity (in thousands of Pesos) | Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Balance at beginning of year | 23,928,237 | 10,197,983 | 5,794,964 | | Provisions for loan losses | 4,408,591 | 17,528,046 | 8,107,617 | | Charge-offs | (7,298,071) | (3,797,792) | (5,874,897) | | Balance at end of year | 21,038,757 | 23,928,237 | 10,197,983 | The Argentine Banking System and its Regulatory Framework - The Argentine banking system is supervised by the Central Bank of Argentina (BCRA), which sets technical ratios, capital requirements, and liquidity rules, and consists of both private and public sector banks531536 - The Bank is subject to capital adequacy requirements based on Basel III principles, with minimum ratios of 4.5% for ordinary capital level 1, 6% for basic net equity, and 8% for total capital relative to risk-weighted assets as of February 2013571573575 - The Bank must comply with a Liquidity Coverage Ratio (LCR) to ensure it holds sufficient high-quality liquid assets to cover net cash outflows over a 30-day stress period, with BBVA Argentina's LCR at 314% as of December 31, 2020599600604 - The Bank is subject to the Anti-Money Laundering Law, which requires reporting suspicious transactions to the Financial Information Unit (UIF) and implementing robust 'know your customer' policies688691 Cybersecurity and Fraud Management - In response to accelerated digital transformation and increased cybercrime due to the COVID-19 pandemic, the Bank has focused on initiatives for cybersecurity, fraud prevention, and data protection712713 - Key fraud prevention measures in 2020 included implementing a second authentication factor for online loans, enhancing password recovery processes, and adopting 3DSecure technology for e-commerce transactions716 - The Bank implemented an infrastructure protection plan which included a firewall solution for its websites, security improvements in critical systems like SWIFT, and a new solution for managing privileged accounts, with no cases of customer data leaks, theft, or loss identified in 2020714719 Operating and Financial Review and Prospects This section provides management's discussion and analysis of the Bank's financial condition and results of operations, covering challenging economic conditions, the impact of COVID-19 regulations, operating results, liquidity, capital resources, key trends, and off-balance sheet arrangements Operating Results Consolidated Profit or Loss Summary (in thousands of Argentine Pesos) | Line Item | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | 77,050,867 | 90,244,852 | (14.6)% | | Gross Income | 95,180,555 | 120,882,953 | (21.3)% | | Net Operating Income | 17,836,317 | 24,462,091 | (27.1)% | | Profit Before Tax | 18,102,889 | 24,636,513 | (26.5)% | | Profit for the Year | 10,068,795 | 21,815,454 | (53.8)% | | Profit Attributable to Owners | 10,051,035 | 21,819,964 | (53.9)% | - Net interest income decreased by 14.6% in 2020, primarily due to lower interest from government securities (BCRA LELIQ instruments) and reduced interest from various loan products, reflecting lower volumes and rates793796811 - Fee and commission income remained relatively stable, decreasing by 1.3% in 2020, as a significant drop in fees from deposit accounts (due to COVID-19 relief measures) was largely offset by a 66.1% increase in fees linked to credit cards813815 - Impairment of financial assets decreased by 44.7% in 2020 to Ps. 11,864.8 million, an improvement attributed to better portfolio quality and temporary regulatory flexibility from the BCRA on debtor classification amid the pandemic863864865 - The loss on net monetary position due to hyperinflation was Ps. 22,274.8 million in 2020, a decrease from Ps. 27,518.8 million in 2019, reflecting the lower inflation rate during the year868 Liquidity and Capital Resources - The Bank's primary source of funds is its deposit base, which totaled Ps. 478,223.0 million at December 31, 2020, up from Ps. 400,237.0 million in 2019888 Key Liquidity and Capital Ratios | Ratio | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | :--- | | Liquid Assets as a % of Total Deposits | 56.36% | 49.55% | 36.43% | | Total Liabilities as a multiple of Total Equity | 5.58x | 4.47x | 8.20x | | Loans as a % of Total Assets | 39.70% | 42.96% | 51.16% | - As of December 31, 2020, the Bank had consolidated excess capital of Ps. 52,967.6 million pursuant to Central Bank rules, and its total capital to risk-weighted assets ratio was 19.4%, well above the 8% minimum requirement903908 Trend Information - The COVID-19 pandemic accelerated the adoption of digital tools by customers, with a significant increase in digital product purchases and online transactions, a trend expected to continue926945 - The Argentine financial system is expected to face increased regulation in 2021, with the Central Bank setting minimum rates for term deposits and maximum rates for certain loans (e.g., credit cards, SME loans)939 - Asset quality trends in 2021 will depend on the evolution of Central Bank measures, as regulatory flexibility, such as extending grace periods for loan classification, led to a decline in delinquency ratios in 2020939 - The Argentine banking system remains under-penetrated compared to Latin American peers and is largely unconsolidated, suggesting significant room for industry consolidation and growth if economic conditions stabilize931933 Off-Balance Sheet Arrangements - The Bank utilizes off-balance sheet financial instruments, including derivatives, credit commitments, and guarantees, to meet client needs and for its own asset and liability management947 - Credit commitments, such as agreements to lend, and guarantees are subject to the same credit policies as on-balance sheet loans, with many commitments expected to expire without being drawn upon951 - The Bank acts as a trustee for several financial and non-financial trusts but is not personally liable for the obligations of these trusts; liabilities are satisfied by the trust assets952953 Tabular Disclosure of Contractual Obligations Contractual Obligations and Commercial Commitments as of December 31, 2020 (in thousands of Pesos) | Item | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | 50,210,225 | 48,835,852 | 1,374,373 | — | — | | Operating leases | 2,989,674 | 204,288 | 707,992 | 1,260,611 | 816,783 | | Lines of credit | 52,858,621 | 52,858,621 | — | — | — | | Guarantees | 841,908 | 735,642 | 41,048 | 64,500 | 718 | Directors, Senior Management and Employees This section details the Bank's leadership and workforce, including the Board of Directors, senior management, aggregate compensation, board committee structures, employee numbers, and share ownership by directors and executives Directors and Senior Management - The Board of Directors is led by Chairwoman María Isabel Goiri Lartitegui, and the senior management team is headed by Chief Executive Officer Martín Ezequiel Zarich, appointed in 2015956963 Compensation - The aggregate compensation paid by the Bank and its subsidiaries to all directors and officers for the fiscal year ended December 31, 2020, was Ps. 747.735 million, with an additional Ps. 39.323 million accrued for 2020 to be paid between 2021 and 2024968 Board Practices - The Bank's corporate governance includes a Supervisory Committee to monitor management's compliance with laws and regulations, and several board committees such as the Audit Committee, Nomination and Remunerations Committee, and Management Committee970978983 Employees Number of Full-Time Employees | Year | Main Office | Branches | Total | | :--- | :--- | :--- | :--- | | 2020 | 3,118 | 2,901 | 6,019 | | 2019 | 3,826 | 2,495 | 6,321 | | 2018 | 3,568 | 2,521 | 6,089 | - As of December 31, 2020, 2,457 employees were unionized, and the Bank considers its relations with employees to be satisfactory, having not experienced conflicts with the union for over 20 years1006 Share Ownership - As of February 28, 2021, share ownership by any individual director or senior executive represented less than 1% of the Bank's capital stock1009 Major Shareholders and Related Party Transactions This section identifies the Bank's principal owners and details related party transactions, noting that BBVA is the largest shareholder and all transactions were conducted on comparable terms to those with unrelated parties Major Shareholders Beneficial Ownership of Ordinary Shares (as of Feb 28, 2021) | Beneficial Owner | Number of Shares | % 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) | 99,307,764 | 16.21% | | Administración Nacional de Seguridad Social (ANSES) | 42,439,494 | 6.93% | - As of December 31, 2020, BBVA had a total equity interest in the Bank of 66.55%1013 Related Party Transactions - Transactions with related parties, including controlled companies, controlling shareholders, and key management, were conducted in the ordinary course of business on substantially the same terms as those with unrelated parties and did not present unusual risks10171018 Financial Information This section covers the Bank's legal proceedings, including anti-money laundering violations and a class action, and its dividend policy, which is currently suspended due to BCRA regulations related to the COVID-19 pandemic Legal Proceedings - The Bank is involved in several legal and regulatory proceedings, notably with the Financial Information Unit (UIF) filing two actions against the Bank and its directors in 2019 for alleged violations of anti-money laundering regulations10321034 - In February 2020, the Bank was notified of a class action lawsuit concerning alleged damages to investors in certain investment funds it managed, related to modifications in the price of future dollar contracts1035 Dividends - As a result of the COVID-19 pandemic, the Central Bank of Argentina (BCRA) suspended the distribution of dividends by financial institutions, extending this suspension until June 30, 2021, by Communication 'A' 71811042 - For the year ended December 31, 2019, shareholders approved dividend payments totaling Ps. 14,500 million (Ps. 2,500 million plus a supplementary Ps. 12,000 million), while for 2020, a dividend of Ps. 7,000 million has been proposed, subject to BCRA authorization271040 The Offer and Listing This section provides information on the trading of the Bank's securities, including its ordinary shares on BYMA and ADSs on NYSE, along with historical high and low closing prices for both - The Bank's ordinary shares are listed on the BYMA (ticker: BBAR), and its American Depositary Shares (ADSs) are listed on the NYSE (ticker: BBAR), with each ADS representing three ordinary shares10441047 ADS Price History on NYSE (US$ per ADS) | Period | High | Low | | :--- | :--- | :--- | | Year ended Dec 31, 2020 | 5.77 | 2.27 | | Year ended Dec 31, 2019 | 13.97 | 3.06 | | Year ended Dec 31, 2018 | 26.60 | 7.18 | Ordinary Share Price History on BYMA (Pesos per share) | Period | High | Low | | :--- | :--- | :--- | | Year ended Dec 31, 2020 | 188.85 | 69.40 | | Year ended Dec 31, 2019 | 183.45 | 80.55 | | Year ended Dec 31, 2018 | 170.50 | 89.00 | Quantitative and Qualitative Disclosures About Market Risk This section details the Bank's risk management framework, covering credit, financial, and non-financial risks, including the non-performing loan ratio, VaR model usage, and management of liquidity, interest rate, and foreign exchange risks - The Bank's risk management model is structured around three main risk groups: Credit Risk, Financial Risk (including market, liquidity, and interest rate risk), and Non-Financial Risk (including operational risk)1169 Credit Risk Ratios | Ratio | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-performing loan ratio | 1.50% | 3.58% | | Coverage ratio | 245% | 148% | Daily Trading Value at Risk (VaR) (in millions of Pesos) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Average | 226.41 | 81.60 | | Maximum | 431.58 | 273.42 | | At December 31 | 225.50 | 43.57 | - As of December 31, 2020, the Bank had a net liability foreign currency position of Ps. 1,389 million, where a hypothetical 10% devaluation of the peso would result in a positive effect on net income of Ps. 139 million9021231 PART II Controls and Procedures This section addresses the effectiveness of the Bank's internal controls, with management concluding disclosure controls and internal control over financial reporting were effective, and KPMG issuing an unqualified opinion on the latter - As of December 31, 2020, the Bank's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective12371238 - Management's assessment concluded that the Bank's internal control over financial reporting was effective as of December 31, 2020, based on the criteria established in the 'Internal Control—Integrated Framework (2013)' by COSO12411242 - The independent registered public accounting firm, KPMG, audited the internal control over financial reporting and issued an unqualified opinion on its effectiveness as of December 31, 202012421246 Corporate Governance This section details the Bank's corporate governance practices, including its audit committee, code of ethics, principal accountant fees, and significant differences from NYSE listing standards regarding director independence and committee composition - The Board of Directors has appointed Mr. Alfredo Castillo Triguero as the audit committee financial expert, as defined by the SEC1252 - The Bank has a Code of Conduct that applies to all management and employees and is available on its website1253 Principal Accountant Fees (KPMG) | Fee Type | 2020 (millions of Pesos) | 2019 (millions of Pesos) | | :--- | :--- | :--- | | Audit fees | 149.28 | 86.46 | | Audit-related fees | 6.24 | — | | Tax fees | — | — | | All other fees | 0.14 | — | | Total fees | 155.66 | 86.46 | - The report discloses significant differences between its corporate governance practices and NYSE standards, including not having a majority of independent directors on the board and variations in the composition and requirements of the nominations and compensation committees126112681269 PART III Financial Statements This section contains the audited consolidated financial statements of Banco BBVA Argentina and its subsidiaries for 2018-2020, prepared under IFRS and including KPMG's unqualified opinion, with notes detailing hyperinflationary accounting and COVID-19 impacts - The consolidated financial statements were audited by KPMG, which issued an unqualified opinion, stating the financials present fairly, in all material respects, the financial position and results of operations in conformity with IFRS as issued by the IASB1294 - The auditors identified two critical audit matters: 1) The provision for expected credit losses (ECL), due to significant measurement uncertainty and complex judgments, especially given the COVID-19 pandemic; 2) The measurement of fair value for difficult-to-value (Level 3 financial instruments), which involved subjective auditor judgment on unobservable inputs129813001304 - The financial statements have been prepared under the assumption of a hyperinflationary economy in Argentina since July 1, 2018, in accordance with IAS 29, with all items stated in terms of the measuring unit current at the end of the reporting period (December 31, 2020)1449