Earnings Call: Q2 2021

Aug 6, 2021

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Banco DO Brasil Second Quarter 2021 Earnings Conference Call. This conference call is being broadcast live via webcast through Banco DO Brasil website at www.bb.com.brir. The replay of the conference call will be available through the phone number plus 55112080400 until August in English and Portuguese. To access the replay, please ask the operator to listen to BB's conference call. Identification will be required. The full presentation without you detailing the main aspects of the Q2 2021 results was made available yesterday and can be accessed at Banco DO Brasil's Investor Relations website. If any of you need assistance during the conference call, Please request the assistance of an operator by typing star 0. With us today, we have Fausto Ribeiro, CEO Ricardo Forney, CFO and Daniel Maria, Head of Investor Relations. First, Mr. Fausto Ribeiro will make the opening remarks, followed by Mr. Ricardo for any considerations. After that, we will open the Q and A session. Mr. Fausto Ribeiro, you may now begin. Good morning, everyone. It's a pleasure to be with you today to talk about the results of the 2nd Slowly, in order to guarantee that everybody is going to understand, please let me know if you have any difficulty understanding on the accident. Feel free to interrupt me at any time. Okay. For the 2nd consecutive quarter, Banco Brasil posted record results. In the first half of twenty twenty one, our adjusted net income reached BRL10 1,000,000,000, a growth Of 40% 80% in 1 year. In the quarter, the adjusted net income was BRL5 1,000,000,000, up 52.2 percent from the Q2 'twenty, a higher level of profitability than that we had before the pandemic. This result was supported by our global strategy growth With the portfolio exceeding BRL 766,000,000,000, a growth of 6.1% In 12 months, also NPLs were totally under control, reducing in all portfolios. Credit expenses reduces 52% in the semester due to the anticipation of We entered provisions made last year. With better customer service and diversification of business, We increased the fee income. At the same time, the expenses were under control with a reduction of 0.2% compared to the first half twenty twenty as a result of the efforts In expenses management, the commitment to profitability and the construction of increasingly Sustainable result is one of the guidelines of my term, as I had already mentioned when I was here with you last quarter. To compose the triple of our strategic agenda, in addition to focus on profitability, We have been investing in proximity in digital and products. This proximity can be translated We have knowledge of the customer, their profile and their needs. As a result, we have specialized our services, Models and in this sense, a relevant delivery this quarter was a complete conclusion Of the cycle of service specialization with over 1,500,000 clients started to be served by Argentina. In 3 months, we saw an 18% increase in the profitability of these clients, Another reflection of the success of customer proximity was 10 point increase in our NPS In 1 year, to consolidate the best service and efficiency, we are changing the characteristics of our sales network, migrating to the lighter structures With the increase in customer preference for digital and natural that our service network reflects this behavior, Another important shift is that we almost doubled our partnership with BNP correspondents in 1 year. This Our service is another way to efficiently expand our capillarity. The line setup process Bring a new model of service for head users. Within this model, we have a lower cost We have specialized service in a greater quantity of customer service. We offer human managed service with the use of 2 different solutions. And with that, we improved scale and profitability. We have a set of We have initiatives in digital optimization to improve our business model and in digital transformation, which involves In new source of results, both being enabled by a deep cultural transformation through the anticipation of the use of analytics, intelligence, New ways of patents and new technologies. We are optimizing our business models with the use of technology. In June, we reached 21,600,000 digital customers. Of this, $6,500,000 were assisted by our digital systems to artificial intelligence, both on Falicom We'll be at as well on social media, Expanding our digital popularity and facilitating customers' access In addition to our own channels, this quarter, we raised more than EUR 21,000,000,000 completely digital To solutions that use analytics and data to recommend the best investment options based on the clients' profiles and objectives. When we enter the business digital, we gain efficiency of the transaction. We work with lower operating costs. We had a very positive experience and at the same time, our sales force can be driven through relationship and the device journey. When we talk about digital transformation, we look especially at new sources of results accelerated by open innovation and digital technologies. We are expanding our operations as a platform. We're in banking and new banking products and service. Boto, Our Paragro digital platform already achieved more than BRL 756,000,000 in business Yes, it is our innovation hub in this segment. We also expanded the availability of gift cards in our apps With sales of 420,000 units in the last quarter, we have important competitive advantages In the open bank scenarios, Pemto Brasil was the 1st bank to develop APIs, Credit Solutions, back in 2017 and today is the financial institution with the greatest number of available interface. For us, it's very important to be ahead of the relevant segments that generate value, reinforce our leading And here, I'd like to especially highlight our support to our business. Our credit portfolio for the sector exceeded BRL205 billion, and we announced the biggest harvest plan in history With the availability of BRL 135,000,000,000 in resources, it means 18% higher than the previous progress. Another important milestone was the achievement of BRL100 billion, Teo Rose Lotos, one of the most competitive markets in the financial industry. We also enforces our support Small companies disbursing BRL6.5 billion in the new phase of PROMANI Now in July, to conclude my initial remarks, I'd like to talk about sustainability. Tim, that leads to All of our activities, in the Q2, we expanded the offer of ESG products With the launch of Bibicre Federiga Novario line, in which we disbursed R50 million dollars in loans From May to July this year, in the Green Group credits, which Achieved more than BRL700 1,000,000 in sales in just 1 month. These initiatives help our customers transition to more sustainable economy. Also confirming our commitment to transparency, The B. Adrienne, to the recommendation of the Task Force on Clinique Related Financial Disclosures, TCFD, an initiative that aims to develop a consistent format Well, with all That said, I will give the floor to our CFO, Ricardo Forana, who will talk more details about our numbers, And I will be available for the questions after that. Thank you very much. Okay. Thanks, Fausto, for your insights about structural Initiatives moving forward at Banco DO Brasil. Good morning, everyone. I'm Ricardo Forney. It's a pleasure to be here with you once again. You have all the material distributed by our Investor Relations team. So I will only highlight some of the numbers here. Our earnings came strong in the second quarter With the adjusted net income reaching BRL 5,000,000,000, the highest level of historical data, but 2.6% compared to the 1st quarter and 62% compared to the Q2 'twenty. On a quarterly basis, we saw an acceleration in fee income Converging to the guidance, while administrative expenses remained under control, provision expenses had an increase of 13.8 percent but remained below pre pandemic levels as a result of the high quality of In addition to some residual effect of the preemptive provisions of 2020. The net interest income decreased in part, reflecting an increase in the facility rate, which impacted the funding expenses. This effect was partially offset By the increase in interest income from lower operations, in line with the strong growth of the loan portfolio, Net interest of the normal margin contracted slightly by 10 basis points to 3.6, Impacted by the higher liquidity, if we have the same preponderance liquidity level, the net interest margin would be around 4%. The expanded loan portfolio grew in all segments, reaching BRL766.5 billion. The individuals portfolio presented an evolution of 10.3% compared to June 2020 2.8% compared to March 21. The highlights were the payroll loans with a growth of 16.4% in the year, surpassing the mark of BRL 100,000,000 And also the evolution of non technical lines, especially with personal loans and credit card. The average business portfolio grew 9.7% compared to June 2020 3.7% in the quarter. We reached historical markups of BRL205.9 billion in this portfolio, highlighted Also, the 47.3% growth in agribusiness and deals, which are new ways of financing agribusiness that have shown A significant evolution, growing over 100% in the past couple of years, reaching a balance of almost BRL 18 in June 2021. The Small and Video Enterprise segment grew 24.3% yearly and 0.6% in the quarter, The portfolio of €104,000,000, is keeping a downward trend as a result of amortizations and settlements. At its peak, this portfolio reached BRL186 1,000,000,000. In June, the balance was BRL94 1,000,000,000, Of which only BRL 12,000,000,000 were still in rate period and approximately BRL 9,400,000,000 or 70 8 Should we end the payments in the Q3 of 2021? The liquidity improvement in our portfolio this quarter. The NPL over 90 days is due at 1.86 Percent, down from 1.19 March 21, reflecting the high quality of origination and the robust methodologies from energy monitoring the loan portfolio. The COVID-nineteen had a slight reduction in the quarter at 325.9 percent Again, 328.2 percent in Q1 'twenty one. The new NPL on the portfolio reached 0 point 74% and its coverage reached 74.6%. The CET1 mandate Finally, we made some adjustments to our 2021 guidance. We increased the region's growth for the Euro portfolio to 11% to 50%, reflecting the oil prospects for the segment. On the other hand, we reduced the wholesale range to 3% to 7% growth due to the impact of new settlements And the strategy of targeting these volumes to the sector market. We may estimate to remain unchanged as well in the Expiration for loan losses expanded due with good delinquency rates We released also the net interest income range to 1% to 4% due to Our first question comes from Jaeson Mollin from Scotiabank. You may proceed. Hello. First question is really if you can Give us a sense of the strategy that you're taking in different lines of credit. We've seen some different trends In the back of the sale loan book versus some of your largest private sector peers, I mean mortgages is one that comes to mind. If you can just talk about The nice strategy in the consumer segments and what you see driving growth going forward. And my second question is an update if you can provide an update on the plan and strategy you talked about in the past of selling Thank you. Hi, Jason. Here is Daniel. Let me start with the first question and I'll pass Faust, and Florent, if you give more color about the investments by investments more specifically. What we expect And the strategy for the credit portfolio growth is reflected in our guidance. And certainly, The agribusiness segment is quite relevant, yes? When you see the percentage of the economy, How we present and how it's performing is one important aspect. And certainly, this drives a lot of Collateral business for the bank, yes, just reminding that the customer from the agribusiness has more Products consumed inside the bank. This is one aspect that is reflected in our guidance. By the way, We just reviewed the guidance for this segment. In the case of the large corporates, we have one effect That we see in the guidance, that is basically a big effect. Certainly, we look at this segment. We are close to the company's. This is linked to the strategy of Investment Banking originating deals and doing I'm sorry, servicing the company through this. When you look at the performance in this first half of the year, it's basically Blinded by the strong performance in the last year, just reminding that with the pandemic, some companies came here Not only to go to Brazil, but to the system to raise funds, to be cash rich, exactly to pass through this period. And along the second Half the start of pay this back, yes? And actually, then we are comparing actually a very strong Semester with a semester with more noise. And we revealed the guidance, yes, But we expect to converge to the guidance exactly because we're going to have these effects. When we go to the individuals or repaying business, Certainly, it's one aspect that we have been growing. This is helping also the mix, yes, because Actually, we are moving more towards retail. This is important for the total mix of the credit portfolio. We have certainly the consumer credit as one important driver for this. Payroll loan It's important that we have good participation in the grant in the system. It will continue to be this, but we are Also, the nonpayroll. You saw, for instance, the growth in the credit cards that is an important product, mainly For that we have space to grow, including with the known account holders, yes, you see also a growth in the other consumer credits. More specifically, the mortgage is quite different, our portfolio, relative to the system, yes? Certainly, you have a structural effect that is Mainly, why we see a growth in the system? Because Central Bank changed some rules and this stimulated The system to look more for those loans. In our case, the funding that or the savings accounts that usually Support this portfolio. In our case, for our group business, certainly, we have space to do it. But we are targeting 1 segment In our to grow, that is basically the segment that we have the best penetration. That's the that Our customers that we have payroll, the customers that we have credits, yes? And we have also an effect So that is the reduction of the portion of the portfolio of the low income portfolio. This can be explained meaningfully as you have more write offs on this. And this explains a little bit why the movement in terms of mortgage is slightly different from the system, But it doesn't mean that we don't have a business target. It's much more due to the composition of our portfolio. Did I cover all the points of your question before passing to the next one? Yes. Thank you. That's very helpful. Thanks, Jorge. Let's try to explain a little bit about this investment strategy. I can say that this is the same. As we explained before during our Watch Meeting, When I try to explain the results of the Q1, it means that We are going to sell non core assets. Of course, then we have to wait the best opportunities in terms of the market. Nowadays, we have a very comfortable position in terms of capital index. This is the reason that we have to wait the best opportunities. The agenda is keeping keep going. And of course, there will be one to maximize the return Of those assets, we are discussing about Banco Patagonia. We are discussing about Banco Botain And other ones that we'd not consider core business. That's Chris. Let me maintaining the same strategy, maintaining the you're maintaining the same strategy that you've been talking about Similar types of non core assets that you did something about. And you're looking at market opportunities. Yes, yes. We are taking the same steps. Only we are As I said before, we have a very comfortable position in terms of capital. This is the reason that we don't have to move So fast in this strategy, we want to maximize the returns of those assets that we have selected non core business. Our next question comes from Nicolas Hisos from Bank of America. You may proceed. Thanks very much for the chance to ask questions. I have two questions. The first one on your forbearance portfolio, you have a slide there on that. So I understand, if I am confirming this correctly, you have BRL94,000,000,000 In the outstanding balance of loans that were granted some sort of debt relief since the beginning of the pandemic, And out of those R24 $1,000,000 R28 $1,000,000 are not paying anything at all. We are under grace period and we are expecting those grace periods to finish By the end of this year, 2021. Now, so first of all, I wanted to check that that's correct my understanding. And then The remaining BRL82 1,000,000,000, right, we cannot underwrite period. Are you In providing some sort of forbearance or that relief for them, even though they are paying Are they paying less than they should be paying at this point? And then my second question, different topic. I wanted to get an update on the repayment of the hybrid debt with around the BRL8.1 billion in terms of timing and the scheduled payment. First of all, talking about the forbearance portfolio. Actually, it's behaving exactly the way we had expected, Yes. You see that the total amount has been reducing. Yes. The same story for the oil is in gray spirits. We have remaining BRL 12,000,000,000. And when you look at those BRL 12,000,000,000, about 2 thirds of leases scheduled To end the comparative the grace period in the Q3. When you look at inside, about 50% of these are government loans, loans to the government. Yes. In these cases, we have almost fully guaranteed by the federal government, yes? That is very low risk. It's a question of cash flow. Yes. And then the business model is behaving quite well. It's growing the NPL over 90 days as we expected. But when you look at the NPL, it's not far from what is a normal portfolio. Another thing that is Coming back to another point of your question, if we're granting you forbearance, no, we're not. And just as a reference, for instance, we brought up those lines of credit with Credit Genshin that we contracted last year. We had the possibility according to the program to grant some forbearance To some specific cases, yes, we had demand less than 5% for those cases, yes? Then the portfolio is behaving quite well. Performance is going on. Okay. We expect that this portfolio, the first one that is In great periods, it could be residual in the last quarter. Yes, then things are going well. And moving to the hybrid instruments, yes, what we have so far It's the proposal that we made, yes, to pay in 8 installments in store next year. Yes. So far, we have no definition about that. But we understand that it's very likely the scenario. But we need to wait A little bit to have a final position regarding. Thanks very much, Daniel. One follow-up. So the So on the forbearance program, the BRL82 billion, which is not under grace period, Are they making regular payments, like payments as they were making before the beginning of the programs program or not? Sorry, let me check if I understood your question. You're referring to what is in gray spirit or what And the grace period and if this portion has been paid, did I correct? What was your question? So you are saying that the outstanding balance of loans under programs BRL94 1,000,000,000 and all of those BRL12 1,000,000,000 Are not making any payments, if I understand correctly, under the press period. The R82 $1,000,000,000 are they making regular payments then? Okay. Okay. No, actually, the way this is an extract of our portfolio that we show just what we granted any sort of forbearance. And by the way, This is the total no. Let's assume that I have a loan for 1,000,000 and I granted the forbearance for 10. I account or I consider for EUR 1,000,000 not for EUR 10,000,000. For that reason, the total loan is higher. And This portion that is in risk period actually is in the period that we granted to for not paying, Yes. For that reason, these metrics is quite relevant because they didn't pay yet because the date didn't arrive, yes? But we expect it's not new yet, but we expect that this will happen in the Q3, yes? You see that 2 thirds of this, Yes. And looking backwards, how this portfolio is behaving, we don't expect major surprises on this. Our next question comes from Carlos Gomez from HSBC. Please you may proceed. Good morning, ma'am. Thank you for the call. My question is about your legal risk. We saw your strategy to keep in clinical cases earlier and that resulted in lower Legal costs last year, but this is having a rebound taken in here. And they are substantial, right? It can be BRL5.5 billion, BRL6 billion Per year, so these are 3 large amounts. Where do you see this going over the next few years? And is there anything that you or that Congress could reduce this risk going forward. Okay, Thomas. Thank you for the question. Actually, the legal risk, we gave a soft guidance at the beginning of the year that we expected to reach EUR 6,500,000,000 for this year. Just reminding, last year, we had BRL 4,200,000,000, yes? And the reason why we expect higher legal risk is basically the approach that we We're having to those cases, yes? You know that previously, what Brazil had as a policy to go To any resorts, yes, to any to the last resort, yes, to the last court, Yes, to solve the case, but sometimes it's very expensive to do it, yes? And what is the idea? Exactly the test that we made in 2019, Trying to anticipate some of those cases, yes, making agreements, yes? And this EUR 6,500,000 can be explained by the suspense of the bank, Yes. To increase agreements, yes. By the way, this is a quite interesting strategy because we increase Efficiency because you don't need to have thousands of cases to follow-up, yes? And you can, when you do agreements, you get some benefits or Medellin, this is the final impact financial impact for this. For next year, probably we need to fine tune this number as we arrive to the end of the year. But probably the best ballpark I can offer to you is to replicate EUR 6,500,000,000 for next year. Yes, but certainly this is an update That's what we are going to have ahead. Sorry, it's Dan. So you said for this year, you're giving us a guidance of 6 Did you say that from this year you will expect to mitigate that or to again have 6,500,000,000? No. What I said that for this year, the soft guidance For this line, it's EUR 6,500,000 what we expect for the full year. What we delivered so far is 1.7 per quarter, yes? That is consistent with this soft guidance. As a comparison, last year was €4,000,000,000 approximately, yes? And in this process, we expect that for next year, We intend to continue in the division of 6.5%. Did I clarify your point? Yes. So again, similar to this year. And again, in the long run, do you expect this With this strategy, presumably, you pay more upfront, but you pay less later. Should we expect a reduction later on or For the time, it is 3, it is several figure costs. Exactly. This is the idea. It's to try to reduce the total cost Yes, you have 2 impacts. You have the financial cost and you have the administrative costs that you have the entire group to follow-up all those cases. At the moment that we reduce this, we have a lighter structure, yes? And then this is the you got the rationale. Thank you, Sanjay. Thanks. Our next Question comes from Gustavo Schroden from Bradesco BB. You may proceed. Hi, good morning, Vanessa. Thanks for taking my question again. Just one question on net interest income resolution. Your cost of funding increased this quarter And related to the NII and the reason behind that is the increase in the increase in the increase in the increase. But the special year is that Liquid is still increasing. And so how should we expect cost of funding Evolving in the coming quarters and when should we see The benefits of this higher fleet rate on the asset side. I mean, when the repricing of its loan portfolio should mitigate or should offset This increase in the cost of funding. Thank you. Hello, Gustavo, this is Ricardo, Juan Diaz here. I believe that what we have seen in the 1st semester and what we are See happening in the second segment because all the market is now projecting Selic to be at 7 or even above 7 at the year end. I believe that we will continue with this Sorry, Tari, where we have the repricing of our cost of funds Growing. And the net interest margin being compressed by this because The speed of the repricing on the asset side takes a little bit more. And on the asset side, you have also Working that is, let's say, the repricing It's occurring, but it's limited to the competition forces over there. So this is something that we need So we are considering that this is the reason we have, let's say, we adjusted our The guidance for the net interest income And we believe that the range from 1% to 4% is now, let's say, Fair to what we expect for the year end, considering this So the speed of the repricing on the liability side, considering The ability to reprice the asset side. And Gustavo, just to give some numbers To all mismatches. By the way, you can find this in our MD and A. There is a section that we show the mismatches Based on what we have, we have assets, net assets at fixed rates against Net liabilities. 2 thirds of those net liabilities and net assets are financed by Saving deposits, that is basically 70% of CELECO rate. And one part is Current accounts that we are not sensitive to the interest rates. In a certain way, this has moved a little bit impact. And this onethree of this mismatch that we have in terms of assets, About 50% today due price in 1 year. Then this means that liabilities, they priced faster than the assets. And coming to your question, we made an exercise that we shared with Mark that we expect for any 100 basis points move In the interest rate base rates, we should have an impact in the region of BRL 400,000,000 on an annual basis for the NII. When we look at the impact in the NII, it's consistent with this number, yes? Coming To the other part of your question, currencies will be repriced, yes? We tend to have this effect more Towards the end of the year and next year, yes? And certainly, the impact tends to be more this year in terms of the liabilities. Yes. When we built the budget for this year and the other or the formal guidance, we had in the projections A salic rate reaching 3.5 percent by the end of the year. And now all the market is working with 7%. And this comes through what Florent said. The adjustment in the NII can be fully explained by this exogenous effect that is the interest rate. No, that's clear. Just to be sure to understand this, so it would be fair, Fatou, that first half of our next year, maybe the The pricing of assets should be we could see the benefits of a better price on asset side, right? It's hard to say exactly in which quarter because actually we have optionality for part of Those assets, but for sure in 2022, yes. But certainly somewhere in 2022, we tend to have these effects. This concludes today's question and answer session. Mr. Fausto Ribeiro to proceed with his closing statement. Please go ahead, sir. Okay. I just want to say thank you guys, everybody, for this opportunity to clarify A little bit about the result of Banco Brasil in the second quarter, of course, and the first matters also. And I'd like to say that this kind of result is a great It's a record in terms of results of Banco Brasil. And it was just possible because we have a popularity, We have strong people working together in order to guarantee that the goals will be achieved. I hope that these formations here helped you guys to understand a little bit better How was the results of the Banco DO Brasil? And I hope to That everybody was clear with the explanations that we did before. I hope to see you guys at the next meeting in the Q3 of this year. And thank you very much for this opportunity. See you. Bye bye. That does conclude Banco DO Brasil conference call for today. As a reminder, the material used in this Conference call is available on Banco DO Brasil Investor Relations website. Thank you very much for your participation and have a nice day. You may now disconnect.