Good morning, everyone. Thank you very much for joining us on our first quarter 2026 earnings conference call. We are live from our headquarters in São Paulo. We will be dividing this event into 2 parts. First, Mario Leão will discuss the key highlights of the quarter and our growth strategy for the coming periods, as well as an analysis of our financial performance. Afterwards, we will have a Q&A session. At this point, our CFO, Carlos Muñiz, will also be joining us. During the Q&A session, you will notice that there will be three audio options: Portuguese, English or the original audio. To select your option, simply click the button at the bottom part of your screen. To ask a question, just click the hand icon at the bottom of your screen.
The presentation you are about to give is now available for download on our IR website. Now I'll hand it over to Mario, who will begin the presentation.
Thank you, Camila . Good morning, everyone. It's 10:02 A.M. We're beginning right on time. You will see that the presentation for this quarter is leaner because we want to be able to cover the main takeaways. We will jump straight into our Q&A because certainly we like to engage with you. Starting with the results, our net income is down quarter-on-quarter and marginally year-on-year. I'll give you more details of this, you know, how we built this quarterly net income. I would like to draw your attention to the evolution of earnings before tax.
This quarter we grew 5.4% earnings before taxes, meaning that the organic operation of the bank is growing in the direction that we intend it to, so our execution. We will see that with every line breaking down, we will see that our annual growth exceeded 20%. In practical terms, we are paying more taxes when compared to the last quarter. This is a point that both analysts and investors were questioning us and challenging us, so we are evolving in the direction that we were committed to. There are movements associated to our organic operation, and there are also other moves related to the way we are evolving the several entities of Santander Brasil towards having more profitability in the bank itself. With that, we will be able to absorb, you know, capital profitability and earnings as well.
We can talk more about that further on. How does this earnings before tax is evolving? Our NII is growing quarter-on-quarter, 3.1% growth. We will break it down in different lines. Certainly, this also includes market effects, and I will tell you how we manage the banking in practical terms, not looking too much at the market, but looking at the margin and the entire perimeter of the bank's asset liability. It's certainly a positive evolution. There was a drop in fees of 5.5%, and you will be able to see every line, I mean, what is expected to go down, and when do we expect growth. Certainly, we want more. We want to continue to grow, you know, fees unproportionately vis à vis the portfolio. Of course, we have that on an annual basis.
We are growing 1.6x vis à vis the portfolio. Our ROE, due to mathematical effect, the numerator growing and the average PL increasing, which is denominator. ROE goes back to 16%. This is not an structural number, it's an accounting number. Certainly, our mission is to seek for ROE that will grow throughout the year, seeking for an average ROE that is above the numbers from the past. Our goal is to seek for a 20% ROE, this is, you know, part of our target, we are working to deliver that bank in the next coming year. Our cost of risk is flat. We will give you more details about it. Efficiency, due to improvements in expenses and controlled cost efficiency, increases by 110 percentage points in the quarter.
We have one slide when we talk about the strategy and other figures, but I would like to say that we always start with customer centricity. On the left-hand side of the slide, we talk about how we are advancing the numbers. We are growing by 6% in the annual basis of customer growth, so we are growing the franchise. It matters a lot how much I can extract from all of these active customers. We talk about principality, and we are also talking about how we can resignify our share, focusing on, you know, mass retail, that we are also growing in our customer franchise. On the right-hand side, I talk about something very important that we just launched. Recently, we launched Santander Rewards. This is one of the most important deliveries, you know, since I started leading the bank.
For the first time, we are bringing this customer relationship. Focusing on points, benefits, and advantages. Instead of the relationship with credit cards that we always had, I mean, if you consume as much, you have certain number of points or exemptions, but now we're looking at the customer relationship as a whole. We are privileging customers that also privilege the bank, and we are doing that with a lot of engagement. It's almost like gamification. With that, in a multi-channel way, we have customers even closer to the bank. It's a big launch. The campaign will be kicked off on Saturday. I think it's one of the most important events that we will have in real.
With that, we will advance this franchise with clients, and this is one of the big pillars we have, as you will see through the numbers. Speaking about data in the portfolio, we are still focusing on the same line, and I've been almost repetitive. Santander wants to grow, but grow with quality, with, you know, capital generation discipline. Every segment that we produce every day, and as you can imagine, we produce hundreds of millions every day, starting with massive retail, privates, small-sized companies, and large corporate companies. We look at marginal management of profitability of, you know, the asset and customer profitability at every disbursement. We've been doing that impeccably in the past few years. Every month, we look at the performance of everything, and we retrofit our origination system.
The cohorts that have been produced in the past few years are according to plan. Certainly, this also mixes with the previous and older cohorts. When you see growth, which is slightly negative, I look at this construction on a positive side because on the individual portfolio, we are dropping. That was expected because when you talk about low income, we are reducing a few percentage points in the quarter. This is technical and scientific, and we are doing that, you know, according to our schedule. This is our derisking of low income, and we've been doing that for quite some time. We know that in 2026 and even part of 2027, we will complete the derisking of low income because it takes longer because the low-risk portfolio has a longer duration.
It takes a little bit more time. We are doing at the right speed. This runoff, you know, low income, you know, put some anchor in the individual portfolio. I relocate that to the low- income that I want to grow, and I relocate that to high income and other segments. The blend shows, you know, a drop in individuals, but that doesn't concern me too much because, given seasonality, first quarters versus fourth quarters, as I said, our credit card franchise is one of the leading products, and it's performing quite well. We posted a record fourth quarter with coming record months, and you will see that further on. Real estate credit, we are also, you know, evolving quite well. We posted growth, you know, in the quarter, and we grew, you know, slightly above 2 digits in the year.
Home equity, as we call it, is a product where Santander has the leadership, and we are growing origination in by 13 points vis-à-vis traditional home equity. We're doing more home equity when compared to the past. We have monthly origination that is getting close to EUR 400 million, which is almost twice as much when compared to what we did before. In terms of consumer finance, we posted, you know, positive growth, and now we are monitoring the market because we do not want to grow more, I mean, disproportionately vis-à-vis the market because we are already leaders. In practical terms, we are diluting origination, and the consumer finance portfolio is the crown jewel. I certainly we have to do that in a very controlled fashion.
Looking at the current scenario, we cannot, you know, exceed growth, but we already grew 14 percentage points in our consumer finance operation. In electric vehicles, out of every two e-vehicles, one of them is funded by Santander. We have an aggregated quota of 20-21 in electric vehicles more. In some, in terms of some brands, we have 2/3, you know, that gives us 75%. We have high penetration in electric vehicles because the average ticket is higher. New vehicles, the credit performance is better when compared to used vehicles. Therefore, we have concentrated, you know, our growth in the consumer finance in EV vehicles. This is also something that generates higher fees. We are growing exponential our capacity to grow per risk-weighted asset.
Between banks and lines of fees, we are doing some impeccable work for small and mid-sized companies. This is a segment that for many years I'm saying that we are not growing proportionally, and this growth didn't come in the third quarter. Obviously, we wanted to see a different number. I mean, year-over-year is close to 10, but here we were more cautious given the macro landscape. In the segment of very, very small companies, the challenge, the credit challenge, is even higher. We were less aggressive in the first quarter, but together with high income, this is one of the two segments where we have to grow 2+ digits during the year, and we have to gain quota. Large corporate, well, what matter in this quarter was the exchange rate.
I mean, we have a very robust trade portfolio in USD or EUR. You know, that was good for the economy, but not so good for the portfolio because the FX effect had an impact. This is not lack of capital or lack of appetite, but as I was saying, it's due to the fact that we are very focused on marginal discipline and cross-selling. The portfolio evolved 0.4%, and the whole portfolio 3.4%. I said that we would grow 1.6%, and this relationship between, you know, growing fees and portfolio is something that we are very much focusing on. I already mentioned some highlights on the right side of the slide. I mean, individuals, high income, if you add Select, we are growing 3 percentage points of share. As we decrease our mass retail, we increase high income.
We have individuals, I mean, high-income individuals that is growing, and this growth will persist for at least two more years. Well, the next point is the NII. As I said earlier, our growth is very good quarter-on-quarter of 3.1%. NII composition is more due to market NII rather than client NII. Client NII experienced a 4% drop. I mean, when you look at clients, both terms, margins and fees, the delta removes about BRL 300 million between, you know, fees and NII. I mean, the day effect is not, you know, lower. The way we've been managing the bank, and we've been managing the bank this way for two years, we report NII, market NII, and client NII assets and liabilities separately. Our ALM is measured according to the perimeter of liabilities as a whole.
In September of 2024, we started to do a marginal hedge of provision. It's a very dynamic hedge between 50%-60% every day, which will lead us to an average of 75% a year in nine months. If it is dynamic in practical terms, this reduces the volatility of the balance and also short-term interest rates, and it also decreases, I mean, the rollover assets and liabilities. Together with that, we extended our very short-term securities that was very, you know, they were sensitive to coupon. Now we are focusing on long-term bonds because they allow us to get better results through time, with results embodied in mark to market. When you look at our financial management, this was added to the expanded ALM view.
ALM is not just measured by the gross results that reflect in market NII. In the different committees, we manage liability as a whole. The expanded perimeter that contemplates NII, client NII and ALM. We evaluate the teams like that, and we analyze the numbers. I mean, the entire market breaks it down as it is here. I just wanted to make a parenthesis because at the end, we are not very much concerned, you know, if the client NII per liability is performing well or not, because everything is going in the right direction. If it were not for the accounting effects of the Resolução CMN 4.966, the spread would be better. I can do the de-risking in low-income , I can allocate this capital into other segments.
I mean, the spread is flat, and that is very good. The second message is, for the first time, probably in the whole history of the bank, we have the individual's portfolio that is capturing, I mean, it's funding better than the corporate portfolio. One of the golden rules of our management is that we evolve the funding mix of the bank. We are not where we wanted to be yet. We wanted to reach 60/40, but we reached 51, you know, 51/49. This not only reflects our transactional performance, not only in retail, but also in the individual portfolio, but because it costs less to fund, you know, individuals. The second point is that in our low-income or mass retail, there was an evolution, you know, of a margin of 100.
There was a drop from 2024 to 2025 from 100 to 99, but there was 8 percentage points. This same segment with the same cut, I mean, the transactional deposits out of 100, it increased to 106 on year one. This year, there was an increase of 16 additional points. Looking at the last 12 months, I grew by 600 percentage points in terms of deposits with the same liability. One was negative, and the other one was positive. This shows that we are managing to focus in the mass retail. Yeah, it's a little bit lower, but much more profitable. This, with time, will show in the books certainly.
Speaking about commissions, this is a line that in the fourth quarter to the first quarter, it suffers some pressure, typically a reduction. I look at 5.5, of course, I prefer zero positive in Q1. When I look at the breakdown, some of the numbers are explained by seasonality. Others, I would say, we did quite well, and others we need to improve. Cards, that's where we have seasonality. Since we grew, and we've grew cards with quality, with a sound portfolio throughout last year, and in the last quarter we had our all-time high. We had a seasonality that points to a drop, but year-on-year we practically grew two digits. This is quality. It's fees with a credit level in revolving credit, and installments that have earnings and with very good profitability.
Insurance business should have felt an even greater seasonality in Q1. We showed a drop of practically zero. Year-on-year, clear 2-digit growth. We are happy about that. This is less insurance-related , insurance associated with credit, because we are less aggressive in growing loans to our portfolio. We did even better in open insurance which is not related. We have in current account services, we've had a reduction, but we have dropped less than the market. The market feels the pressure of what we call free accounts with no commissions. This is natural, it's healthy, but we are able to engage our individuals and corporate clients so that we would drop less than some of our competitors. This is a number that I also see as positive.
Credit operations a drop due to seasonality, and because we are being less aggressive in granting loans to some portfolios. It's not a number I like to see, but it's explained by a lower production. In asset management, we have two positives here. In consórcio, we are growing at a higher pace. I want a lot more than that. I said earlier today to the whole organization that I expect to grow double that quarter-on-quarter. I think we're going to manage, but this is more recent growth. In asset management, well, we had an effect in Q4, and we have to look at that 20.9% up year-over-year, which shows that our asset franchise, it's lower than the rest of the bank proportionally speaking. We need to grow, and we are going to grow.
We don't aim to double it, but rather to triple it. We have an annual increase pace, which is quite good. In securities brokerage and placement, we did quite well in the quarter. Two strong line items, securities brokerage and capital markets, one of the strongest quarters we've had. In collection services, a very good quarter. Others, there are some effects of portfolio sales and others, nothing that will really drop or call our attention. The highlights, cards continued to evolve well. We grew almost 20% our credit card turnover. In insurance, we have new, lower- ticket products. We have the consumer finance cross-selling. In consórcio, we have fixed bid and reduced installments. These are the two highlights for consórcio. In terms of the asset quality, there's a lot here.
I'll try to be brief so we can speak more about this during the Q&A. Number one, cost of risk. It is dropping some basis points in the quarter. PL is increasing, but it is increasing, in my view, at a very acceptable pace. This is explained primarily by a reduction in recovery. This is explained by a reduction in the sale of portfolios. We sold fewer portfolios. We had an on-block recovery. I would say that business as usual was kind of stable considering the macroeconomic context. Given the context, in some portfolios, they remain concerning. I mentioned them. SMEs or small companies in every business, we have a challenge, although I expect a much better year or a less worse year. Last year was bad for the whole market. We expect a relative improvement.
Every business, till a little challenging, and very small micro companies being a challenge. In cards is a business that is doing really well, but we have minor adjustments to make because the families are very much indebted, and now the government should launch a new program to deal with that in a matter of few days. NPL is doing well. Cost of risk dropping, NPL practically flat. In a full year, it remains at the same level, so we are not concerned here. When we look at 15-90 day NPL, over 90, you know, in the short term, 15-90 day NPL, we see companies dropping a little in the quarter, and there's a component here in companies associated with government programs, and this doesn't become a loss.
In individuals, in 15-90-day NPL, there's a slight increase, and this is linked to consumer finance and mortgages. The rollover of NPL to longer term when the stages change, it is quite contained. We believe that in these two portfolios in Q2, we should have a reversal, and thus we won't have an increase in over 90-day NPL. Over 90-day NPL has some effects here. One of them is in Q4 last year, we did a technical review of each portfolio in our mass income and consumer finance, and we decided that instead of writing off as losses, in Q4, we started managing the portfolio by portfolio, doing it very technically. Sometimes, anticipating the write-offs as losses, and sometimes, working in the opposite way. This had some effect in Q4.
There's some effect now of lengthening the average maturity of the portfolio. This is what drove up over 90-day NPL. Of course, we continue with our discipline of writing off everything that we don't believe we can recover. Then we'll try to offset that by selling the portfolio. I mentioned that there is pressure from agribusiness, low- income, and very small companies, very small enterprises. There are parts of our portfolio that require more attention. We pay attention to all. We pay more attention to some, and these are the ones that are related to an increase in NPL. Talking about expenses, that's another quarter, which I believe we delivered quite well. It's very much in keeping with what I've been saying over and over, over the years. We have a fine management of the lines that we can control.
It's our obligation to do it. Doesn't mean it's easy. We have effects pressure this year. Effects helped us, but not last year. Inflation, collective bargaining agreement, now technology and of course, the effect of the war abroad. We are able to offset all of that with a firm management, and we are delivering a quarter with practically zero growth in expenses. When we break down what is general and what is depreciation and amortization, we are actually reducing our expenses by 0.7% in the quarter. In an annualized way, 0.3%. We break this down into administrative and personnel. Of course, we look at both, and we are reducing our personnel, our headcount. We did that last year. We continue to do this. We want to have a more streamlined and more efficient organization. Expenses increased because we are investing in technology.
There's a technology expansion. It's positive. It's 0% quarter-on-quarter and 0.9% increase year-on-year. Of course, I want to grow revenue more, but by growing revenue, you see, and maintaining our expenses flat, our efficiency dropped 10 basis points, which is good. Some highlights. Cost to serve in Select dropping 19%. I didn't have to reduce the cost of Select so much because I have a very profitable segment with ROE close to 20%, but it's healthy to do it, and we continue to engage our clients. In mass income, cost to serve dropped 44%. It's very positive, but I want even more.
The team knows that we have to improve this by another 30% in the next two years so that we can have mass income segment virtually as cheap as the digital banks, so that we can serve them in the best way possible. We are growing 22% our expenses in business expansion and technology, while we reduce to 3% our recurring expenses. Lastly, I'll speak a little about Gravity. We've spoken about it. The group talks a lot about Gravity. To keep you on the same page, Gravity means Santander no longer processing. The whole bank not having those expensive mainframes that you pay to buy and then you pay to consume. We would stop processing on mainframe and start processing the bank in what we call low platform, which are more modern, flexible, and efficient platforms.
Annualized, once we deploy Gravity, which we expect to happen in Q3, ideally in the beginning of Q3, annualized, in an annualized view, the deployment of Gravity should bring us savings close to BRL 400 million a year. To give you an idea of how relevant it is, almost 2 percentage points of the expenses line item of the bank. Of course, we are looking at all initiatives that can bring us to that point. When we think about AI touches practically everything. We are looking at AI as an efficiency agenda and also as a growth agenda. In our Investor Day in February, the group committed to generate EUR 1 billion by 2028 of results derived from artificial intelligence. Given the relevance of Brazil, this number is about EUR 200 million.
We have committed in practice in 2028 to have this kind of efficiency, but to given order of magnitude. This year, if we had all of the initiatives o n AI, we should have something between BRL 400 million-BRL 500 million due to a more mass use of AI.
To end, let's talk about our income statement. We spoke about each one of these lines, the top line, growing. Of course, it needs to grow and grow more. It will grow more over time, it is growing positively with a mixed dynamic, which is more and more balanced. The direction is clearly correct, the mix is also correct, we have to work to improve speed. The midlines, expenses, others, provisions, although growing a little, they're behaving well. Putting it all together, given the operating leverage of the operation, takes us to a very positive evolution of earnings before tax.
We have DTAs, we have capital and net income reducers, but mathematically speaking, I think that we are at a very healthy state. This is the organic view of the franchisor growing, leading us to a CET1 Basel ratio that are very healthy, 15.2% Basel ratio and 11.2% CET1. We will continue with our distribution policy with IOC, for example. As our profits grow, distribution will grow as well. With this, I will end, and I'll call Camila to start with the Q&A. During the Q&A, for the first time, we're going to have Carlos Muñiz, our new CFO, sitting with me. I agreed with him that I will answer all of the questions, but he'll be sitting next to me. If he wants to add anything, of course, he may do so. Thank you very much.
Let's continue moving to the Q&A.
We will now initiate our Q&A session. To participate, just click in the hand icon that appears in the bottom part of your screen. We will answer the questions in the languages they are spoken. I would urge our analysts just to ask 1 question so that everybody will have a chance to participate. Our first question comes from Thiago Batista with UBS. Good morning, Thiago.
Good morning, Camila. Good morning, Mario. Mario, I don't know whether this is your last call or whether you will be present in the next call. My question is about Desenrola, the government program. I think we are about to hear about this new funding program. We know that this will involve low- income, credit card, consumer finance, and overdraft. Can you tell us a little bit about your view about this new finance program to be announced?
What is the impact you think that this will have in your balance sheet in the coming years in terms of the no monetization of DTA?
Well, at first, this is my last participation in this earnings release presentation, so I hope I will be still close to all of you, and I will be always cheering for the bank and supporting the bank in whatever is needed. I talked to the press not very long ago, and I would just like to say the same thing to all of you. I believe that this program, Desenrola, is indeed necessary. It's being very well designed. I mean, it's being led by the Minister of Trade. They are also calling the banks to design this program together. This was not something done by a lab in Brasília, and then the banks would have to deploy it, but it has relevant advances vis-à-vis the platform back in 2023. Maybe that's why the volume was not as high as expected.
Now each bank will do that through their own channels, even though the framework will be shared by all banks. All the banks will be able to engage that in their tracks in this Desenrola 2.0 program. Why do I say that this is important, and why do I say that this is the right timing? We are looking at the same data. In fact, despite of the fact that inflation is coming down or the economy is growing due to a miracle, despite all of the facts, the level of household debt and available income is critical, and that's why the NPL levels are bad.
We didn't have any advance in terms of the income level of the families in the past few years. That's why the program makes a lot of sense right now. All the parts that the government will announce about the program, all of the new steps, make sense. We participated in the design of the new phase of the program. I'm sure it will be a successful program. I think that there will be millions of Brazilians joining the program. I think the delay, the payment, I mean, the NPL will be above 90 days. People will have a chance to negotiate their debts much better now. It does make sense. It will happen.
The bank, since we all participating in this new design, they will be able to participate, and Santander will be one of those banks. This is about Desenrola, and I'm not at liberty of saying anything else because we hope that the government will, you know, will announce it in full. About DTAs, the deferred tax assets, there are many things that are at play here at the same time. We already have a relevant DTA base, not only us, but the industry as a whole, you know, some more or less. This topic of DTA, according to the accounting criteria that will change, that changed after 2025, everybody accumulated DTAs. In 2025, you were not obliged to launch that DTA in your accounting books.
By now, we had, I mean, 420%, you know, since December 2021 is now posted in our results, and this is competing with the marginal ALLL. The combination of what was in the past combined with historical ALLL, this generates, you know, a lot of taxes. I briefly mentioned that since last year we've been re-coordinated, you know, according to what is correct. We are trying to coordinate all of the results of instruments that have less DTA, and sometimes they pay less taxes, you know, to our consumer finance, and we are placing all the results to the bank. I generate more profits because I can absorb DTAs faster, but on the other hand, I am leading this result to pay more taxes when compared to the other entities.
In the short term, I am reducing, you know, net income, and I am assigning to other instruments that pay more. You're increasing your own working capital in practical terms. These tectonic plates in our balance sheet, they are happening as we speak. Through this reorganization, all of the legal instruments, what we want is to boost the earnings of Santander there. You will see that Banco Santander Brasil S.A. will show better results vis à vis other instruments, you know, at arm's length.
The organic operation will have to grow, and it will grow in the several lines, but it will have to grow in the bank so that the organic that comes apart from the reallocation in other instruments will allow us to offer more taxes, therefore will be able to absorb more DTAs. We hope that we will be able to absorb all DTAs in the first, second, and third quarters.
Sorry. This is. Can you continue?
We think we will be able to absorb all of the DTAs we want in the first quarters of 2027, 2028, this will certainly depends on the evolution of the commercial activity. We are taking all the necessary measures to optimize the consumption of DTA in the bank. That's it. Thank you, Tiago.
Thank you, Tiago.
We have a question from Daniel Vaz with Safra Bank . Welcome, Vaz.
Thank you, Camila. Good morning, Mario and Carlos. Thank you for allowing me to ask a question. I would like to talk about SMEs and try to get more details on the NPL levels for SMEs. I know that there are several aspects that, you know, impacted this decline in NPL. I would just like to understand how much of that comes from this block and what sizes of companies, or whether there is any specific size of company. If you could elaborate more on whether this will continue to increase in the next quarters. I mean, there are also cohorts that were originated in the past and the government, you know, funding, not FGI but FGO, so that they can disperse more in the program.
Please, if you could elaborate more on this subject.
Well, I'll try. I hope my voice is better," he says. First of all, about the programs, about 25% or 30% of the portfolio goes to government lines, and this is where most of the delays occur. Having said that, there is a pressure on SMEs, so this is a point of attention, no doubt about it. Macro affects that segment, so that's a point of attention. Proportionally, I want to grow there more than in other segments. I'm not gonna do that by using a remote control. This quarter we didn't grow because we prefer to be more at the margin of that. From now on, we will look for opportunities to grow more and we'll try to grow two digits sequentially in the next coming years.
As a whole, this is a portfolio that really demands close attention. In terms of the continuity of the numbers going forward, well, Daniel, it's hard to say that it's going to happen. With a very tough macro and interest rates, you know, increasing less. I mean, if there is a drop of one or two for this audience, it doesn't make a lot of difference, but it affects the entire, you know, the entire scenario. For Brazil to grow 1% or 2% for this world of service or retail, it does make a lot of difference, maybe more than one point here or there in terms of interest rates. It is possible that the delinquency may go up. You talk about FGO, and the government will certainly announce that when the right time comes.
We also know that the government will certainly, you know, support Pronampe and FGI. The government is sensitive enough, you know, both BNDES and the Treasury department , they are looking at that. We believe that both things, you know, Desenrola and this program, will be managed together simultaneously.
Now we will call Mario Pierry with Bank of America. Mario? Welcome.
Can you hear me now? Good. Good morning. Thank you for the opportunity. Mario, I would like to thank you for the partnership in recent years, and I'd like to wish you a lot of success in the next steps of your career. I would like to double-click on the auto loan portfolio. You said that you're market leaders, 20% market share. We continue to see healthy growth of the portfolio. When we look at Brazilian Central Bank data, we see the delinquency in that segment go worse 130 basis points year-on-year. I'd like to know, how do you see the segment still with high interest rates, as you mentioned? What gives you confidence to continue to grow that portfolio?
If Central Bank data pointing to a worsening of 130 basis points, is there anything contaminating the industry that you're not seeing that we're not seeing? The question is, several players changed their write-off policy, and perhaps the 130 basis points is a little bit inflated. Thank you.
Thank you, Mario. Thank you for the kind words. It's been a pleasure. We'll continue to be close. Well, I briefly commented when I talked about new cars, new vehicles, and EVs, and I mentioned that our consumer finance is market leader. I'm not being arrogant about it but, of course, we end up having a gross penetration. What do I mean by gross penetration? An ability, a capacity of origination, which is not 100%, it would be exaggerating. Out of 100 contracts that are applied in the market, we effectively participate in more than 90% of those applications. We have visibility in the market, which is virtually complete. Of these 90 applications, we choose to grant 20 auto loans. There are 70 of those applications that we looked at, and we didn't want them because of the risk-return ratio.
The margin can be tempting sometimes, but the cost of risk, the loan-to-value, and the quality of the collaterals, that don't make sense. We just choose those 20. That's why I said that we should not grow disproportionally to the market, because we would be taking more risk than we want. How do we read market data compared to ours? Do we see deterioration as the market sees? No. Why not? Because with this broad and almost total visibility that we have of the market, we can cherry-pick where we are going to be placing our bets. In recent months, in the last two to three quarters, we have been focusing less on used cars, proportionally speaking, less on motorcycle, and focusing more on new vehicles. In new vehicles, more in EVs.
It is not by chance that we got 50% of average quota of origination of loans for EVs. Some of the brands, the ones that are growing the most, I'm not gonna mention any names, but the ones growing the most, we have a market share of close to 70%, and we chose to do that. We wanted to prioritize n ew vehicles that have a much lower delinquency rate than used cars. We end up granting loans to higher net worth clients with more income, with more financial capacity, and with a better rating.
This combo of better rating, better credit rating, better income, all of that drives our short-term and long-term performance. It doesn't mean that this is not a nervous business. It is. It's not zero cost of risk. The recovery capacity of Brazil is not equal to that of the U.S. We have the legal framework of guarantees, but it's far from performing as it is overseas. The margin is improving, and we continue to be positive. Our business is perhaps 5% or 6% of the whole portfolio, but it is a very healthy business of consumer finance ex auto loans.
We learned from our mistakes, and with what we did right, now we have the verticals in our consumer finance business, which is exactly what we want to have, a consolidated and profitable business, both in marginal origination and in the stock. We think about auto loans, which is the core, we have another part with a very good alpha in margins. We cannot grow out of proportion because consumer finance in Brazil has to be well done, and we learned the hard way that in some verticals, we cannot operate. Overall, it is a healthy business, a sound business. We're paying attention to the macroeconomic environment, we continue to operate well, and we'll continue to grow along the year, just like the market.
If we grow a little less than the market, that's fine as well because we have the right risk appetite. Thank you.
Pedro Leduc now with Itaú BBA.
Hello, Camila, Mario. Congratulations on your trajectory, and I wish you a lot of success. I have two questions. First, when we look at the SMEs portfolio growing 10% year-on-year in this macroeconomic context that you mentioned, perhaps you could help us review what should be the strategy looking forward, particularly with this risk opportunity balance. That's number one. Second question is about policies of the Resolução CMN 4.966 and lengthening of the write-offs. Anything happening in this quarter? The NPL formation was different than NPL. How should we think about impact on over 90 NPL? What would be the impact of these changes on the coming quarters?
All right, I'll start with the second question, Pedro.
As I mentioned, and thank you for the kind words. In Q4, we saw some effect, and in Q1, a little more of this effect of the changes in the write-off policy. I'll stress this because it's important that this becomes clear. We are being a lot more technical, a lot more strict than we were before. We used to write off according to the average, and everything that is an average is not necessarily technically more accurate. If we just, we prefer to do this double click. We saw the results, and we did a very technical work on that. For example, cards. I've been saying this, and you follow this up close. Cards is one of the portfolios that we have grown the most. It's one of the franchises where I'm betting more chips.
In practice, we are bringing forward the write-offs of cards because this is ex-post, looking at many of the previous cohorts. In auto loans and some other products, we have a recovery capacity that lasts longer. It would be incorrect to have a write-off and then recover that via sale of portfolio. That's the kind of technical analysis we are doing now, and this will bring us a material result. Will this change the curve of our over 90 NPL? No. Our average over NPL, especially over 90-day NPL, tends to have a higher number than the average number last year. Perhaps the curve will go up a little, and over time, we can show you what this effect is. It's not a problem to do it.
It's something we've done technically, and this was reviewed in all possible forums that you can imagine, and we will continue to report accordingly. From the standpoint of the portfolio, you asked about NPL, cost of risk, and here's what I can tell you, Pedro. There are a number of tectonic plates moving here. We are de-risking in mass inco me, low income. I mentioned some data in my presentation. To make this more tangible, in this quarter alone, our mass income portfolio dropped by close to 4%, and this reduction in low income has two effects, and both are healthy. In the short term, I am accelerating my runoff in low-income clients, and this brings a higher NPL because I'm accelerating the de-risking. There's another negative effect, but which is also healthy. I am not generating revenue that I'll have to provision for.
It's important that you understand that. An important digression. My top line, my revenue, particularly NII, in an annual view, it starts dropping, and this is good information for you. It starts dropping 1%-2% in the aggregate number for the bank just by de-risking low- income. Everything the revenue grows is the top off, recovering that in a technical and surgical reduction that I am doing in low-income portfolios that I'm not interested in, and all the rest is healthy growth. My 0.8% growth in the quarter is not an ultra-sexy number, but when you look at the breakdown of that number, it has a very positive quality, and that's my, that's why I am optimistic because we are growing well and with good health.
There is this initial counter effect when we look at NPL formation, some basis points above, cost of risk reducing. It sounds wrong. There are many moving parts there. There is a concern that you didn't mention. Somebody might mention. What about wholesale? Are you well-provisioned? We don't respond to that name by name. Of course, that's just part of NPL and cost of risk, and we have some relevant names, as anything is, as everything is in wholesale. We are safe regarding our provisions every month. I'd like to make a more general comment here. You can ask us later how this translates into practice. We provision for the wholesale, first based on the legal vehicle. Secondly, based on structure. Why am I talking about a legal vehicle?
Some of these single names that people talk a lot about in the media and among the analysts will have a substantial exposure overseas. We're part of a group, we have differentiated funding. In Madrid, for example, many or some of these single names, 90%+ of our exposure is in Santander, Spain, quote, unquote. Of course, I manage that. It's my committee of risk, my commercial team, it doesn't affect the bank itself and our shares. That's an important nuance for you to pay attention to. When we see exposure of Santander, it's not all in Brazil. I do a lot in terms of assets and project finance. You know we are leaders in project finance and have been so for about 10 years now. We do a lot in the energy desk, for example.
It's a more operational exposure, not a financial exposure. When we look at that by asset, we provision according to the level of structure, collateral, if it's operational or not, et cetera. Obviously, we only provision for what is in the balance sheet here. Some of these big players are not in the Brazil balance sheet. It's a broad answer. If I didn't cover everything, please feel free to ask a follow-up.
Thank you, Mario, and I wish you a lot of success.
Thank you, Pedro.
We have a question from Brian Flores with Citibank. Welcome, Brian.
Mario, thank you for this long-lasting partnership, and certainly, I would like to wish Carlos great success. You mentioned an interesting point, and you talked about 6% growth in client NII, and in you know, older cohorts just grew 3% year-over-year. I would just like to know that the gap between these two growths doesn't mean a monetization challenge with expenses going forward, whether you wouldn't have to invest more to engage clients a bit more, or whether this gap will face some efficiency issues going forward.
Thank you.
Thank you, Brian. Thank you for your kind words. This is a very strategic question, and it's a great question as well.
Well, this morning when I talked to my employees, I mean, I talked a lot about that. I mean, to grow six year-on-year, given the fact that 75% is a very good growth, the number is +4 million, which is a good number. I think I talked about this many times. We are not running to add more clients because the journey is to grow the franchise also through clients, but mostly active clients and clients with principality. For me, the challenge is: Can I do more to grow our client top line? I want to grow active clients and clients with principality. The main challenge is to turn 3 into 6 or 6 into more. What are we doing to that end? Obviously, part of that is credit appetite.
I'm not gonna change my credit appetite just to grow the number of clients. I have to grow clients within adequate appetite, and this has to be in tune with my portfolio. Balanced, sustainable, diversified, and that can deliver a ROE of 20+ after 2028, and even the group was committed to that number during our Investor Day. We are heading in that direction, and this is a fact. We can only do that if we maintain our discipline in terms of cost of risk. I'm not gonna grow at the expense of our appetite. I mean, Desenrola and et cetera. Inflation will fall, and this will certainly increase my appetite in the lines where I already operate.
In the audience where I already have a good credit appetite, how can I grow more? This has to do with all the tools we have, commercial value, and value propositions. When I talk about tools, I'm talking about platforms, our One App that we deployed to the entire base, maybe, you know, in record time. In only nine months, we began and ended the deployment. All of our account holders are now in the new app. Now we will also focus on customers that only have one product. We want them to increase their product list. We have our new CRM that started in Brazil. Then turned out to be, you know, a global platform, a customer interaction process. This allows for hyper-personalization. I think I mentioned that oftentimes. Santander Rewards that it was launched just the day before yesterday.
With that, we want to deliver a very encompassing view for the client when he feels that he is valued, and this has to do with the tools/value, especially for high-income and SMEs. We want to deliver the right value proposition expected by the client, and we want to win that in the market. In high-income and in SMEs, and certainly in wholesale, we have to have a service model that has to be better than that you find in the market. In terms of offering and tools, given our capital discipline, we have to deliver more, and I am certain that we can do that. But this is a journey, of course. It's a tough journey because we have extraordinary competitors, not only in Brazil, but in other geographies. There is the regulating body that is constantly challenging us.
This is the path. Thank you. Thank you very much.
[Break]
We'll go back to Portuguese with Bernardo Guttmann with XP.
Good morning, Camila, Mario, Carlos. Congratulations on your career at the bank.
I'm sorry, Bernardo, for some reason, we cannot hear you.
You cannot hear me? My audio is enabled.
Please hold for a moment. We are trying to sort it out. Please just hold one minute, Bernardo, and we'll try to sort out the audio issue.
Good morning. Can you hear me now? I would like to explore the topic of growth of mix. The bank is clearly migrating the mix to more collateralized products, real estate, consumer finance, collateralized SMEs loans. Is this mix delivering what you expected in terms of risk-adjusted return? Is there any segment that you think you were sub-allocated where you would like to grow more during this year? Thank you very much.
We apologize, but we cannot hear Camila anymore.
We apologise for the technical glitch with the platform. I think that it is resolved. Again, I would like to invite Bernardo. Let's try Bernardo. I think you can hear me now.
Yes. We can.
Good morning, Camila, Mario, Carlos. I'd like to take this moment to congratulate you on your history at the bank, and I wish you success and luck in your new challenges. I wish Carlos a lot of success. I will repeat my question. It was about growth of the mix. The bank continues with this movement of migrating to collateralized lines, real estate, collateralized SMEs loans. In your view, is this movement delivering what was expected in terms of risk-adjusted return? Is there any segment that you feel you were sub-allocated and that you would like to grow more during the year? Thank you very much.
Thank you, Bernardo.
I would like to apologize for the technical glitch and thank you for your patience. Not only you, but all of you that still are with us. I'll try to make it up for you. You touched on a strategic point of our strategy. One of our golden rules in recent years which is the mix, a healthier, more resilient, all-weather mix. That's what we want to deliver. Every quarter, we are delivering at Santander an all-weather bank for the whole group, for our market, for our management, and this has to do with a good mix. Are we where we wanna be? Absolutely not. This is a continuum that will take another year or two for us to get to the right mix, reducing mass income, and with a greater balance sheet, but we have progressed in the recomposition of the mix, as you yourself said it.
Do we see the impact of that in the line items of our earnings? Absolutely. When we look at the cohort of origination, and we do the backtest of that, I told you we do backtesting every month, but we do a more in-depth backtesting every quarter when we have a better notion of M3 and delays in payment, and then we do in-depth analysis. This is headed by Carlos Muñiz, CFO of the bank, with Carlos Diaz, our CRO. As the first line of defense in the equation for profitability, they challenge the businesses to improve the mix. Do we see this in the new cohorts? Oh, absolutely. Of course, we always have to be feeding back the origination model with the lessons learned. I would say that 90%+ of what we're doing is exactly where we want it to be.
What about the aggregated earnings account of the bank? Like I said, there are many tectonic plates moving at the same time. I am accelerating the write-off, my runoff, and the special part. This increases NPL in the special segment, but it's healthy that I do that because I'm purging the future NPL in that segment, and I have a top-line effect. I don't have the highest spread of the portfolio, which is the mass income segment, but the quality of the earnings I am building, the quality is improving month after month, quarter after quarter, and every quarter you will be able to see this. New cohorts, absolutely. Check. With a big backtesting discipline. If we had more time, Muñiz could speak for half an hour about how he's doing this as a recently arrived CFO.
This is one of the main steps of our weekly management. Little by little, this mix will impact the portfolio. That's why I feel safe to say that with the mix, we are going to have a 20%+ profitability as of 2028 because we will have purged everything that needed purging. The new cohorts will have originations at 20%+ ROTE.
Thank you, Mario. I wish you a lot of success.
We're moving to our last question from Marcelo Mizrahi with Bradesco BBI. Mizrahi?
Hello, Mario. First starters, thank you for everything. In the buy side, now in the sell side. Well, thank you for everything we learned from you. Thank you for the partnership. I wish Carlos a lot of luck. My question is, this week we wrote about the 15-90-day NPL compared to the over 90-day NPL.
As you mentioned, and the Central Bank also said that the over 90 is losing a little of comparability. Also, in terms of comparison within Santander, when we look at 15 to 90-day NPL of Santander, for individuals, the signaling for individuals and for SMEs is constructive. For SMEs, NPL is actually falling in Q1 quarter on quarter. For individuals, NPL is growing, but growing less than in recent years. I checked in the last four to five years, every Q1, especially last year, 15 to 90 NPL would grow more than 0.2%, which is what it grew this quarter. When I look at the 15 to 90-day NPL, because I think that's the most reliable piece of information to compare, I have a more constructive quality.
My question has to do with the cost of risk. Looking at the cost of risk, looking forward, you talked about a derisking of the portfolio. The question is, if we consider specific cases, I don't know if you have a provision or you expect to increase provisions looking forward. If we consider the loan book portfolio with a slightly lower risk, we start seeing this for individuals and SMEs. Should we expect an increase in the cost of risk throughout the year, or should we see the COR more stable?
In terms of our expectations for Q1, we expected a higher provision, but because of this dynamic of seasonality and of the special cases. I would like to hear more about the dynamics of cost of risk, looking forward.
Thank you, Marcelo, and again, thank you for your kind words.
You know, you said you learned from me, but I also, and the bank, learned a lot from the analysts. You're always very technical. You always ask the most difficult questions, and we have to prepare more. Thank you. Well, you touched on several points, and I'll try to touch on many of those. If I leave anything out, please let me know, and I'll add to that. It is true that 15 to 90-day NPL has constructive aspects, and when we look at the seasonality of Q1, it's good that you look at the track record, particularly last year, it was more difficult. I remember that a year ago we spoke about real estate. The effect was even more material than it is now. It is material.
If you look at real estate is 25%-30% of that, 15-90 delta. It's just the real estate. If we consider consumer finance, we'll definitely go beyond half. These are products that have a very healthy nature in terms of short-term delinquency. It seems constructive. For SMEs, the same. How do I interpret that, Marcelo? We have been, and you're the first to corroborate that, we have been more conservative in terms of growing the portfolio. I'm not saying that we are better than others because of that, but we are trying to be more selective in each audience of each sub-segment. Yes, we will try to have an over 90 NPL that is better than the market, because we are growing the portfolio less, and I grow less the denominator.
The effect on NPL formation and the cost of risk, if I were growing the portfolio at 10%, 12% a year, of course, this will help me get better indicators, and I'm not getting that. I'm not getting that because I decided not to. It's not by chance. It's not helping in that regard. Of course, in this quarter, because of the FX and some specific portfolios, we ended up having an expanded portfolio that posted a slight drop. I don't expect that the portfolio will end 2025 dropping. Of course not. It should grow some points, X points less than what is expected by Febraban, but it will grow.
The denominator should be positive, diluting the cost of risk, and if I can do this well in my portfolios, I should be able to make NPL not grow beyond the growth of the portfolio so that the cost of risk in practice would remain at the same order of magnitude, more or less, some basis points. It's too early in the year to say what's going to happen at the macroeconomic context. I spoke about household debt, and I spoke about SMEs, and in the small enterprises, we are concerned. Every business is not solved. It's not for Santander, it's the whole industry. We cannot say that we are going to have a reduction in the cost of risk that will be more visible, but we don't expect the cost of risk to deteriorate, at least not materially, this year.
In a longer term, 2027, 2028, the way we are de-risking the portfolio, the way we are originating portfolios in a more diversified, balanced, and safer way, we'll have a bank with a reduced cost of risk when we think about 2027, 2028. That I can say, because we are going to have a mid to longer term effect of our de-risking and the new originations which are more precise, like I mentioned in a previous question. We expect kind of flat order of magnitude, some basis points more or less. This quarter it was some basis points less, even with the portfolio growing. With the portfolio growing, we are going to have a tailwind, and we'll continue with the same discipline in dealing with the macroeconomic environment, because you, we, and all of our competitors have to face that.
Again, we believe that March 31st, the balance sheet will have the right provision for those single names, but the situation continues to evolve. April will be better than March. May will be better than April. We don't do ex-ante provision for a scenario that has not materialized yet. Of course, we have our recovery modeling, our net present value modeling of our exposure, so we take into account the scenarios. Whether we have negotiations happening where we sit at the table with the companies, designing constructive solutions. Of course, we'll monitor all of these discussions to evaluate how many provisions we need, because again, we cannot generalize. We have very low exposures, and we have more positions in operational assets and projects, and in the power desk or derivatives, and it's a different nature when we consider clean operations and holding operations.
We'll continue to do this, and depending on the evolution of the names, we'll have to reinforce the provisions. I hope I covered all of the points regarding the cost of risk, because this is a cross-cutting theme. I know it's important, the team is available. I will give the floor to Camila for the final statements.
Very well. Thank you very much. I would like to thank all of you joining us this morning. Myself and the whole investor relations team of Santander will be available if you have any further questions. Thank you very much. Have a great day and a great week. Thank you very much, everyone. It's been great spending these years with you, and I will continue supporting and cheering for the bank. Thank you very much.