Banco do Brasil SA

BOVESPA:BBAS3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Banco do Brasil First Quarter 2018 Earnings Conference Call. This event is being recorded. [Operator Instructions] This conference call is also being broadcasted live via webcast and through Banco do Brasil website at www.bb.com.br/ir where the presentation is also available. The replay of the conference call will be available through the phone number [phone], in English and Portuguese. To access the replay, you must ask the operator to listen to BB's conference call. Your identification will be required. Participants may view the slides in any order they wish.

Before proceeding, let me mention that this presentation may include references and statements, planned synergies, estimates, projections and forward-looking strategies concerning Banco do Brasil, its associated and affiliated companies and subsidiaries. These expectations are highly dependent on market conditions and on the performance of domestic and international markets, the Brazilian economy and banking system. Banco do Brasil is not responsible for updating any estimate in this presentation.

With us today, we have Mr. Bernardo Rothe, CFO; and Mr. Daniel Maria, Head of Investor Relations. Mr. Daniel Maria, you may now begin.

[Daniel Maria, executive]

Good morning, everyone. Thank you for attending our first quarter 2018 financial results conference call. I'd like to start the presentation on Slide 4. On the left, we have the highlights of the first Q '18 results. The adjusted net income grew 20.3% over the first Q '17, driven by a 5.4% growth in fee income; the improvement in credit quality with a decrease of 25 basis points in the NPL ratio over 90 days, which resulted in a decrease of 26.3% in the credit provision expense; and a reduction of 0.2% in administrative expenses.

On Slide 5, we bring the track record of some market ratios of Banco do Brasil, and we have also added to the series the average estimates by analysts for 2018 and '19 to those metrics. These estimates are prior to the new payout announcement made yesterday. Adjusted earnings per share reached BRL 1.09 in the first Q '18. The dividend yields was 2.72%. The price-earnings ratio reached 10.10% -- 10.10, and the price-book value ratio was 1.13 in the first Q '18.

On Slide 6, we advance the information of the net income. On the graph at the top of the page, we present the NII for the first quarter 2018 that reached BRL 12 billion. The net financial margin, which comes after the deduction of BRL 4.2 billion of allowance for loan losses expenses, reached BRL 7.7 billion. The fee income reached BRL 6.5 billion. And the administrative expenses were BRL 7.8 billion, resulting in an adjusted net income of BRL 3 billion with 13.2% ROE.

On Slide 7, we show the main components of the net income. The NII net of recovery reduced 11.5% over the first Q '17. Such outcome can be explained by a combination of events: deduction of the average balance, mainly with the very small and small companies; sale of our corporate bond that was under judicial recovery, resulting in the recognition of the acquisition that previously was market-to-market, affecting the treasury income. Note that in the first Q '17, the new revolving credit card regulation was not fully required, distorting the [ computation ] with the first Q '18. Although the funding expenses had strongly decreased, the deduction in the financial costs were not sufficient to offset the impact of -- in the revenues. We expected this dynamic in margins. And we are confident that in the upcoming quarters, margins will improve, converging to the guidance.

On the fee income, we observed an increase of 5.4% compared to the first Q '17. We highlight checking accounts fee going up 9.1% and asset management fees up 9.7%. Administrative expenses decreased 0.2% compared to the first Q '17 and 5.8% over the fourth Q '17. Driven by a better credit quality in the loan portfolio, ALLL expenses reduced, reaching BRL 5.4 billion.

On Slide 8, we have the expanded view of the loan portfolio and the credit quality indicators. On March '18, the loan portfolio reached BRL 675.6 billion, a reduction of 0.8% over December '17, explained mostly by the decrease in the companies portfolio. The NPL ratio over 90 days have decreased for the third quarter in a row, reaching 3.65% in March. Disregarding a specific case, the NPL over 90 days would be 3.22%, returning to the levels below the industry.

The NPL formation reached a nominal value of BRL 6.3 billion, resulting in an indicator of new NPL over the loan portfolio of 0.99%. The coverage ratio was stable at 153.6%. And the cost of risk attained 3.8%.

On Slide 9, we show the organic individual portfolio. This portfolio was stable compared to December and grew 3% in 12 months, reaching BRL 177.2 billion. 77% of the individual portfolio is comprised of payroll loans, mortgage, salary loans and auto loans. The NPL over 90 days reached 3.49%, explained by the seasonality of the first quarter of each year. The NPL formation had an occasional increase in the mortgage portfolio, worsened by the seasonality of the first quarter as [ is common ]. The coverage ratio was 165 -- 168% while the ALLL expenses were BRL 1.8 billion. It is important to highlight that the 2017 vintage of the individuals portfolio is the best ever. 2018 vintage should follow this behavior.

On Slide 10, we present the companies portfolio in the expanded view. In March, loans to companies reached BRL 263.2 billion, a reduction of 6.3% year-on-year and 1.6% compared to December. This drop was concentrated in the very small and small companies segment. The NPL over 90 days reached 5.76% and the lowest since the fourth quarter of 2016. Disregarding a specific case, this ratio would be 4.54%. The new NPL reached the nominal value of BRL 2.8 billion, with the new NPL over the loan portfolio ratio of 1.25%. The coverage ratio attained 139.7%. With a better credit quality of the portfolio, ALLL expenses in this quarter reinforces the downward trend, reaching BRL 2.5 billion.

On Slide 11, we have the agribusiness loan portfolio. This portfolio grew by 1.5% on December '17 and 2.6% year-on-year, reaching BRL 184.7 billion. The NPL plus 90 days was 1.85%. The decrease in meat and milk prices along 2017 affected producers and drove the increase in the NPL. In the first Q 2018, this group of customers still explains the increase in the NPL. The coverage ratio reached 156.7%, and the ALLL expenses remained stable.

On Slide 12, in the blue line, we bring NIM, which decreases to 3.84% in this quarter. We also presented NIM with recovered credits in the dotted blue line. Comparing the first Q '18 to the fourth Q '17, the reduction of NIM was -- can be explained by increases in delinquent assets associated with the decrease in the loan portfolio. Other factor was the fewer calendar days that impacted the accrual of interest income in the loan portfolio. At the bottom, we simulate NIM without those effects we've just mentioned. In this scenario, the NIM would be at 4.09%.

With the NII convergence to the guidance along the year, we expect an improvement in NIM in the upcoming quarters. The spread of individual portfolio improved to 16.47% over 16.29% in the previous quarters. In the agribusiness, the spread decreased from 4.79% to 4.71%, in line with the track records; while the companies spread dropped to 4.66%, mainly impacted by the deduction in the exposure to the segment of very small and small companies.

On Slide -- the total ratio reached 18.4%. The common equity Tier 1 was 9.76%. We reinforce our target to maintain at least 11% of CET1 in January '22, building up capital organically, even assuming the new payout ratio.

Ending the presentation, we discuss the guidance. Adjusted net income was BRL 3 billion, which shows convergence to the guidance analyzing these quarter results. The NII reduced 11.5%, and all projections reinforce that we move towards the range along the year. The loan portfolio decreased 1.3% as a consequence of the 7.3% reduction in the companies portfolio, a 2.9% increase in the individuals book and 6.4% in the rural loans, within the guidance. The allowance for loan losses reached 4.2% -- BRL 4.2 billion and the fee income grew by 5.4%, both inside the guidance range. Administrative expenses stayed below the guidance, decreasing by 0.2%.

This concludes today's presentation, and we can go to Q&A session. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Mr. Carlos Macedo from Goldman Sachs.

[Carlos Macedo, analyst]

I have a couple of questions actually. The first question is on your loan growth because the quarter is still not particularly strong. But I wanted to ask about your origination levels. Itaú earlier in their conference call talked about origination [indiscenible], closing into where they were originating back in 2014, particularly for the SME and the consumer books, not as much as the corporate. Can you talk a little bit about that, where are origination levels relative to historic levels? And when do you expect it to get closer? Second question, can you talk a little bit about your ag book? Did you see in the quarter if there was a pretty substantial increase in acceleration in the nonequalizable loan book, whereas the equalizable loan book did not really increase that much. Could you talk a little bit about that?

[Daniel Maria, executive]

Carlos, this is Daniel Maria speaking. Thank you for your question. First of all, about the origination, we have here in slide -- on Page 23 that we show the levels of disbursements that we're observing. Just an observation, this slide is prepared in a way that it's an index, then it's compared to the first quarter '16. Although our portfolio shows some decrease in the business due to the characteristics of the new origination that we are doing with a shorter term, the level of disbursements is included. And we show it here in this slide. And it's consistently -- it is growing. So that's the reason we believe that we are going to -- we are in this process of changing the mix of the portfolio.

[Carlos Macedo, analyst]

Could you -- just going back, could you talk a little bit about the different portfolios within that -- the individuals and the corporates? Just getting an idea of SME, given that it is -- it does represent a very important part of your book that's been declining over time.

[Daniel Maria, executive]

Yes, sure. In the case of medium-sized companies, as we mentioned, there's 2 facts for the decline for this portion in the portfolio. First of all, we are in the process of writing off some of the -- this segment is more exposed to the cycles. And we are in the process of writing off some of the loans. I would say that we are in the end of -- at the end of the cycle. And when we look at the net disbursement for this segment, we start to see positive numbers and mainly for working capital. For the total lines of credits for medium-sized companies, we still see some negative disbursements, but we see the inflection point happening in the first half of the year. And just an observation, when I refer to medium-sized company, I meant small and very small companies. Because the way we disclose, we are referring to companies up to BRL 25 million in revenues. The medium-sized companies pair together with corporates, and they are behaving well in terms -- stable in terms of disbursements. And coming back to your question about the agribusiness. In the case of agribusiness, we have -- the pressure in terms of NPLs is the combination of facts, yes. But the NIM -- or the most important aspect is the segment of livestock. I'm referring to cattle and milk -- milk production. We had -- the prices dropped, and this put pressure on the margins of the producers and certainly reflected in some NPLs. The cycle of this production is longer compared to the other products. For that reason, this has remained in our NPLs. There are efforts that the network is doing to change these trends. And we expect to come to a normal cycle, certainly. And there is another aspect that is important to remind, is usually the crop or the harvest happens -- or the end of the harvest happens in the first quarter of the year. And sometimes you have some delays or past dues that will be normalized in April. But we expect along the year to come to normal cycle of NPLs.

[Carlos Macedo, analyst]

Okay. But as far as the equalizable versus the nonequalizable loans that really drove growth with the nonequalizable loans this quarter?

[Daniel Maria, executive]

Carlos, just a clarification, are you referring to the lines of credit equalizable? Or is it sort of -- what's your question? Can you clarify?

[Carlos Macedo, analyst]

Sure. So in the quarter -- typically, the first quarter is a weak quarter with growth, and I think that's something that is seasonal. But this quarter, you actually grew fairly decently. And if you look at the data, it shows that it was mainly on the back of nonequalizable loans, which typically -- which is one of the reasons why equalization revenues weren't as high as loan growth was for agro. I'm just wondering what led to that and what should we expect going forward.

[Bernardo Rothe, executive]

Macedo, this is Bernard speaking. Just to clarify, we have very low interest rate that we are living nowadays. We have been reversing with more lines, using demand deposits and so on that does not carry the equalization. And that type of transaction, they are very good in terms of spread for us. So that's the reason, just because of the level of interest rate from the market right now. So some of the lines that carry equalization, they are pretty much in line with the lines that have no equalization at all at this point in time given the way the market is behaving in terms of interest rates.

[Operator]

Our next question comes from Mr. Olavo Arthuzo from Santander.

[Olavo Arthuzo, analyst]

Just wanted to get a better understanding on the mindset of you about the payout ratio from now on. We understand that every year, you discussed how much would be paid, so it could be changed again next year. But given the operating trend the bank is presenting, I believe that these levels should prevail. But now before this announcement, you guided the market to a capital level of 11% by 2022. And when then reached that goal, you will discuss again the use of the capital of the bank. One of the alternatives could be the increase of the payout. So my question is, given the flag raised with this announcement of the payouts and the potential return for 40% in the payout already this year, is it possible to imagine that the bank once reached this 11% target could raise the payout even more above 40%?

[Bernardo Rothe, executive]

Thanks, Olavo, for your question. Bernard speaking. Well, the rationale of the payout is very simple. We reach our target for next year with some margin in this quarter, right? And then we keep growing the capital base as we've been growing for the last 3 years. It's pretty much under control, the 11% target, as a minimum for 2022. So there is no reason for us to reach that 11% target way before 2022. So we have room to start to increase the payouts and start paying more and increase the dividend yield of the bank at this point in time given the very comfortable situation that we have in our capital base. Just to remind everyone, the minimum level in Brazil is 8%. That will be 8% next year. But the Central Bank did not activate the counter-cycle buffer. So 9.5% already give us 1.5% buffer. And our projection, we think that even with an increasing payout, we are going to be over our own minimum target and we should reach the 11% with very -- with comfort. We can even reach that before 2022. So that's the rationale. And as we decrease, when we need to retain more earnings, now that we are in a very good track, we increase the payout again. In relation to what we are going to do when we have excess capital, right, over the 11%, is one, if there is room to increase payout, that's one possibility. So we can go over 40% if that's the case when the time comes to have a decision. So there are other ways of dealing with the excess capital. But of course, the payout is one of them. I believe that's the one more efficient for investors, so -- but we have other options as well.

[Operator]

[Operator Instructions] Our next question comes from Mr. Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

My first question is regarding the net interest income and versus your guidance. You showed a weaker number in terms of growth versus what you're expecting for the full year, and you talked about the confidence that you can meet that. If you can describe a little bit of what's driving that. It looks like to me the first quarter of last year was quite strong as a base effect. But what should we be assuming here going forward for the rest of the year to be able to show this reduction in negative growth? And my second question is -- well, why don't I ask after the first question.

[Bernardo Rothe, executive]

Okay. Thank you, Jason. Well, we have several things that impact the first quarter that's not going to repeat. Same thing that we discussed 1 year ago when we also had in the first quarter of last year lower number of current days and so on and so forth. So we have that again, not going to repeat throughout the year. So that adds to the net interest income. We have -- the comparison is going to be better throughout the year, so we tend to move through the guidance for that as well. We -- this is working more, and the cleanup in our portfolio is almost done in some lines of credit. So for example, we are expecting the working capital for very small and small companies to increase. In fact, it has increased in April. So we expect the quarter to show a growth in working capital for very small and small companies that there is a very good spread. So we keep disbursing in several different lines of credit [ where you need the visas ] and so on. So that's helpful. And throughout the year, it should move through the guidance. Of course, when we leave the second quarter, we are going to carry the first quarter difference, right? So we're going to improve, but it's going to be below the guidance here in the second quarter. But we are going to move gradually throughout the year until we reach the guidance at the end of the year.

[Jason Mollin, analyst]

That's helpful. My second question is a follow-up on what you define as one-off items on a quarterly basis. And you're providing the data on Slide 28 where you show the one-off that you describe for economic plans. I mean, I understand of adjusting for this because we talked about this over the past, because it can be volatile. And I just wanted to understand the BRL 539 million this quarter. I mean, are we getting close to an end here? Or should we continue -- I mean, it was about BRL 290 million in the fourth quarter and BRL 227 million in the first. So I understand looking at earnings without this effect, but I also think, obviously, it impacts your book value.

[Daniel Maria, executive]

Jason, Daniel speaking. Thank you for your question. Just the first quarter '18 wasn't abnormal. And there is -- and in fact, that we can explain this was we have the room for this longtime-discussed economic plan. And we have some anticipation of [indicernible] before that, that this impacted in more payments in our side. Then there is one factor that there is a delay between the payment and when we release provisions because we -- there is a process that we usually will follow up in the courts to do it. Now this is one part that explains that. The definition for the current plan, I think, our view that is very good for the system and for the savers as well. And now there is the process of entering in the agreement. Then we are going to see the normalization of this line in the next years as we have the agreement...

[Bernardo Rothe, executive]

Formalized.

[Daniel Maria, executive]

Yes, the agreement is formalized. I would say that we believe that this trends to a normal number, but we are going to see that coming months.

[Jason Mollin, analyst]

And is that going to be more in line with what we saw in the fourth quarter and the first quarter or even lower than that?

[Daniel Maria, executive]

Jason, it's hard to say at this time because there is a time for those agreements. Then we need to observe a little bit more. We need to create more series to say something. But certainly, there is a trend to go to normal numbers.

[Operator]

Our next question comes from Ms. Natalia Corfield from JPMorgan.

[Natalia Corfield, analyst]

It's a follow-up on the rationale on the capitalization and the payout ratio. I think the rationale for the increase in the payout ratio at this point in time is clear. However, Banco do Brasil still has one of the lowest core equity ratios, I think, in Latin America. I understand that you want to grow this to 11% by 2022. But just to understand, given the balance of dividends that you want to pay and the level of your core equity, what would be the correct ratio that Banco do Brasil would be comfortable with? Would that be the 11%? Or is it another number?

[Bernardo Rothe, executive]

Okay. Natalia, thank you for your question. Well, 11% over time is the minimum, right? So we don't want to stay at the minimum. We always work with some level of additional buffer over our own minimum, right? Just to remind you, before Basel III and so on, we have the minimum of 12% and we were operating at 14% for the total ratio, all right? That was before the Basel III rules start to be deployed, and the core equity Tier 1 was not so important at that time. We follow pretty much more the total capital ratio. And that's when we build our capitals. We have total capital base on a Tier 1 and Tier 2 as well that are more efficient for investors. Right now we have a very high total ratio of over 18% right after the total reduction. So you have a lot of room to manage the capital base. And that we have a clear goal of 11% as a minimum. We should be working -- operating close to 12% all the time, right? And that's what we should -- to have room to take opportunities in the market if there are opportunity to be taken, right? So we, again, take the opportunity and still be over our own minimum of 11%. So 12% is something that we look at where we should be close to over time. And our projection, we think that we are going to reach our minimum targets before -- as we reach the 9.5%, way before 1 year in advance, we should reach the 11% also in advance of 2022. And we should be, in the long run, running close to 12%, with another 1% over our own minimum.

[Natalia Corfield, analyst]

Okay. So overall, you think that you can run at the 12% and you can still increase your payout ratio? And even with a higher payout ratio, you will still be able to deliver a core equity of around 12%?

[Bernardo Rothe, executive]

Exactly.

[Operator]

Our next question comes from [ Mr. Alex Christopher ] from UBS.

This concludes today's question-and-answer session. I would like to invite Mr. Daniel Maria to proceed with his closing statements. Please go ahead, sir.

[Daniel Maria, executive]

We thank you all for attending our conference call. And any further question, we are available for that. Have a nice day and have a nice weekend. Bye.

[Operator]

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.