Banco do Brasil SA

BOVESPA:BBAS3

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Banco do Brasil Second 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] until August 17, 2018, in English and Portuguese. To access the replay, please ask the operator to listen to BB's conference call. Identification will be required. Participants may view the slides in any order they wish.

Before proceeding, let me mention that this presentation may include reference 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. Welcome to the earnings release teleconference for the second quarter 2018.

Let me start the presentation on Page 4, with some earnings highlights. The adjusted net income in the second quarter '18 reached BRL 3.2 billion. There was a change of 7.1% in relation to the first quarter of '18 and 23 -- 22.3% in relation to the last year -- to same period last year. In the first half 2018, the adjusted net income reached BRL 6.3 billion. This was an increase of 21.4% in relation to the first quarter, first half in 2017.

The fee income grew 5.5% in relation to the first half of '17, reaching BRL 13.3 billion. The NII increased quarter-on-quarter 5.3% and reached 24.6% in the first half 2018. That implies a decrease of 8.1% in relation to the first quarter '17. The administrative expenses reached BRL 15.8 billion in the first half of 2018. This was increase of 1.2% in relation to the same period last year and [indiscernible] inflation.

We highlight that we revised the credit provision expenses guidance due to the outstanding improvements in the credit quality in the period. The new guidance -- the revised guidance for the period is BRL 16 billion to BRL 14 billion.

Moving to the next page, we bring some [ market ratios ] . The adjusted earnings per share is BRL 1.16 in the second quarter of '18. That means the dividend yield's up 3.65%. The price/earnings ratio reached 6.74% in the second quarter of '18 and the price/book value is 0.78%.

On the next page we bring the net income and profitability in 2 perspectives. We connect the second quarter of '18 and the first half of 2018. It's important to highlight that the fee income covered 83.2% of the admin expenses. This is the highest level since 2014. We bring also here the return on equity according -- meeting the market to establish. The ROE reached 13.3%.

On the next page, Page 7, we bring the earnings breakdown. NII increased 5.3% comparing quarter-on-quarter. It's interesting to highlight the movement of the treasury -- or the contribution of treasury for NII and also how the loan operations grew in the period.

The NII for the first half reached BRL 36.8 billion. This implies a reduction of 8.1% when compared to the same period last year. The fee income grew 5.5% in the first half 2018 when compared to the same period last year. This growth was driven by the checking accounts that grew 7.2% and the asset management that grew 13.2% in the previous year.

The administrative expense grew 1.2%, reaching BRL 15.8 billion in the first half 2018. This low inflation shows a solid cost control, and the cost-to-income ratio reached 38.9%. The other administrative expenses decreased 29% in the first half 2018 when compared to the first half 2017. We want to highlight the improvement of the asset quality of the portfolio, and mainly the contribution of the company's portfolio to that income.

On the next page, we bring the loan portfolio on an expanded view. The loan portfolio increased 1.5% when compared quarter-on-quarter. The NPL ratio above 90 days decreased 31 basis points, reaching 3.34%. This number includes the [ ex-specific ] case and we want to inform that this case has already been sold in July. And considering [ this case was sold ] the NPL ratio is 2.92%, the data for June.

The NPL formation below -- is below the previous quarters and reached 0.55%. The coverage ratio increased to 166.18. Cost of risk decreased for the third quarter in a row, which is 3.57%.

On the next page, we bring the loans to individuals. That improved 2.2% quarter-on-quarter. We would like to highlight the diversification efforts in business volume [indiscernible] credit card portfolio, salary loan and consumer finance showed some growth in the period.

The NPL ratio above 90 days increased 16 basis points, reaching 3.33%. The NPL formation is below the previous quarters, reaching 0.80%. The coverage ratio increased reaching 175.75. The credit provision and expenses was BRL 1.8 billion in the period for this portfolio.

On Page 10, we bring the loans to companies on an expanded view. The portfolio is almost flat compared to the previous quarter. We highlight that the middle market, corporate and government portfolio increased in a way that compensated the reduction in the very small and small companies portfolio.

The NPL ratio above 90 days for this portfolio decreased 5.2%, the fourth decrease in a row. The NPL formation for the period is below the average of the last quarters, reaching 0.54%. The coverage ratio increased to 151.46%. The credit provision expenses decreased to BRL 2 billion, bringing the lower volume since 2015.

On Slide 11, we bring the agribusiness portfolio. Agribusiness portfolio grew 2.1% quarter-on-quarter. The NPL ratio above 90 days decreased 24 basis points, reaching 1.61%. The NPL formation is below the previous quarters, reaching 0.3%. Coverage ratio increased to 184.93%. The credit expenses -- credit provision expenses was BRL 1.2 billion.

[indiscernible] For the harvest 2018/2019, [indiscernible] made available BRL 103 billion to finance. This implies an increase of 21% to -- when comparing to the disbursement for the previous harvest.

On Page 12, we bring you the net interest margin. NIM increased 14 basis points in relation to the previous quarter, reaching 3.98%. [indiscernible] NOIs means continuing the recovery. The increase was 25 basis points to 4.48%.

On the next slide we bring the spread by portfolio. The spread for the credit portfolio is stable when compared to the previous quarter. And the spread for individual portfolio is 16.45%, agribusiness is 4.7% and company portfolio is 4.62%.

On the next slide will be the BIS ratio. In June 2018, we reached 9.61% of CET1. This number gives the effects from the resolution CMN. We reinforced our target to reach the minimum amount of CET1, up 11% in January 2022.

On the Slide 15, we bring the change in the CET1 comparing June numbers to March 2018. We highlight here that the increasing the capital is mainly due to the mark-to-market of the security portfolio. The number of 9.61 includes the decision of Resolution CMN 4,680 that allows the bank to add back to the capital with tax credits generated with losses in the hedge of investments outside Brazil.

On the next page we bring the guidance and the [ performance]. The adjusted net income of BRL 6.3 billion analyzes is in accordance with the guidance. The NII is minus 8.1% below the guidance but much better compared to last quarter. We think -- we see that the NII is heading towards the guidance.

The organic domestic loan portfolio increased 1% mainly due to the behavior of the company's portfolio that included 7%. Individuals and rural loans and agribusiness loans is growing according to our forecast.

The provision expenses net of recoveries of write-offs is BRL 7.8 million and we show here the new revised guidance of BRL 16 to BRL 14 billion for the year. Fee income increased 5.5% [ above ] inflation in accordance to our guidance. Administrative expenses grew 1.2% in accordance with our guidance and below inflation.

With that we end our presentation and we can go to the Q&A session. Thank you.

[Operator]

[Operator Instructions] Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Carlos Macedo from Goldman Sachs.

[Carlos Macedo, analyst]

First question, if you could answer. Trying to get an understanding about margins. You said you expect the NII growth to migrate to where -- to your guidance by the end of the end of the year. We're looking at originations, and of course, the originations are much stronger particularly on the consumer portfolio. They're up, I think, 38% year on year. A little bit weaker in the second quarter on your corporate portfolio but still on the consumer portfolio really strong. And if you look in your release, you can see that the rates from these originations are lower than they've been in the past. Your credit spreads or your yield on loans on the consumer side remains very strong. Matter of [ faith ] in the end. Should we expect any pressure under here as a result of [indiscernible] of the new loans that are picking up the spreads -- should we expect any pressure as a result of the lower spreads that are on the new loans. Second, could you please just comment a bit on your SMEs book both in terms of asset quality and in the levels of origination given that we have that only rolled in to the whole corporate book.

[Bernardo Rothe, executive]

Good morning. Thank you for your questions. Sorry for the noise in the background. Anyway, going to [indiscernible] we're seeing the interest rates going down [indiscernible] but we are not going down the same page to liquidate the corporate finance going down. In fact [indiscernible] in the second quarter, we have to see high interest rates in the long-term duration [indiscernible] and we do that we do based on the duration of the new loan and [indiscernible] so in fact we have some [indiscernible] interest rates given the change in the [indiscernible] in Brazil in the second quarter. So margin [indiscernible] at a good level, you could see that it's [indiscernible] in the consumer book and how calculate that spread, right, just to remind everyone. We will get the spread at a time [indiscernible] view and we kept that stable throughout the life of the transaction. So although the interest rates are coming down, the spreads [indiscernible] at a very good level. So we see compression margin coming -- potentially next year, we are supposed to have more compression spreads [indiscernible] the competition. But competition is not that strong there. Only the [indiscernible] strong competition like stable loan. So why it should behave okay from now on? [indiscernible] compression of margins next year is competition [indiscernible] better economic recovery in the country. In terms of the SME book, this has been growing with the second [indiscernible] level business review with all our clients in the SME book. And remind you that what were needs [indiscernible] small company up to BRL 25 million in the annual income, so revenues. So [indiscernible] growing, working capital transactions. We're not also growing that [indiscernible] portfolio of client. We still have a big portfolio of investments in [indiscernible]. Although the [indiscernible] participation of the time, it's still a big portion of it as we are not growing this portion of the portfolio that carries the variability to trade [indiscernible] returns [indiscernible]. We should [indiscernible] portfolio [indiscernible] but working capital should stabilize and stop growing, and we've reduced the pace of the cleanup of the portfolio, taking out the old transactions that we have in the book and replacing [indiscernible] that are coming at a very quality and very book adjusted return. So we may see growth in this portfolio next year. [indiscernible] at the end of the year anyway. [indiscernible] we are going to grow the working capital, not [indiscernible] so even though we are growing at a very good pace with working capital, that we should keep the [indiscernible] on growth on the overall portfolio. Okay?

[Operator]

Our next question comes from Thiago Batista from Itau BBA.

[Thiago Bovolenta Batista, analyst]

I have one question about NPL formation or the new NPL. This quarter, this new NPL was really very low. Was there any, let's call it, nonrecurring event that impacted NPL formation? Or we can believe that the NPL formation will stay around this -- the neighborhood that the bank posted in this quarter?

[Bernardo Rothe, executive]

Thank you for the question, Thiago. NPL formation should improve over time gradually. We may have some variations between one quarter to the other. But the trend is to have NPL formation improving quarter-after-quarter gradually. We may see some seasonality in the first quarter of every year, so we tend to have higher NPL formation in the first quarter every year. But second quarter then comes back to normal. And then from thereon, we should see the formation improving and then increasing a little bit again first quarter next year, given certain seasonality that we have in our portfolio with the consumer book and agribusiness. We may have a big impact in the third quarter in the NPL formation for companies coming from the final resolution of the one specific case, that's a pretty big one. So for company, you may see even, that can be even negative. But that's the one-off. The trend is to keep improving NPL formation gradually over time, with some variation given some quarters.

[Operator]

Our next question comes from Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

My question is on your distribution strategy. We did see your branches continue. Well, I guess, year-on-year, they're down 6.8%. Very stable traditional branches quarter-on-quarter. But we saw you continue to add, on the digital and specialized service, points of sale. If you could talk a little bit about this strategy? What that means for headcount? And if we could even see more improvement in the use of these channels and costs?

[Bernardo Rothe, executive]

Thank you, Jason for the question. In fact, we're still deploying our digital strategy. So we still have things to be done. That, of course, we are not going to see a big reduction in traditional branches moving forward, like the change comparing June '18 to June '17, was almost 7% drop in the number of branches. Over time, that reduction should reduce because we've been doing too much what we have to do, but specialized services should keep growing for a while, as we deploy these strategies. And we don't need to replace employees, so the natural attrition should reduce the number of employees moving forward as well. So we are not -- we don't have any plans to do a big shift like what we did at the end of '16, right? So that should be normal business from now on. But the trend is reduction of additional branches and increasing digital and specialized services over time, with the natural reduction of employees coming from retirements and so on. Okay?

[Jason Mollin, analyst]

That's great. And we're seeing -- we've seen that your expense, your admin expense line is growing, at least in the first half, grew in line, almost the lowest end of your guidance. So is there a possibility? I mean, is this the trend? Obviously, you didn't change the guidance, but is there any opportunity to beat that and reduce the expense growth below the 1% to 4%?

[Bernardo Rothe, executive]

No, in fact, for this year, we should be close to the mid of the guidance, high -- a little bit higher than the mid of the guidance. Given that we have negotiations going on right now with the unions, then we should have some increase in salary happening from September on. So that would put some pressure in expenses. Personnel expenses still would be the biggest portion of our expenses. And I don't know -- we don't know yet how much is going to be this increase. I can tell you that the unions are asking for inflation plus 5%. We are offering inflation, that's it. So we don't have the final figure yet. Should be closer to what we are proposing than what they are asking for. But that put some pressure on the expenses in the second half, among other things. So we should be over the mid of the guidance. Okay?

[Operator]

[Operator Instructions] Our next question comes from [ Gabriel Nobrega ] a from Citibank.

[Unknown Analyst]

If we look at the average fee per clients, we see that Banco do Brasil is actually lagging its private peers. We understand that this should be related to your divestments and some divisions that you need to generate strong feeds such as [indiscernible] and [indiscernible]. Do you believe that Banco do Brasil can close this gap to its private peers? Are there any initiatives in place for such?

[Bernardo Rothe, executive]

Thank you, Gabriel, for your questions. We want to increase revenues made by clients, but through increase of consumption by our clients, right? So we want our clients to consume our products and services of Banco do Brasil. With that, we are going to increase the fees made by clients. So that's part of our strategy. In fact, as we specialize our service, we're increasing our ability to serve clients on an active basis, meaning that with more relationship managers, we have more people having points of contact with clients, and that can generate more business. And that's what we've been doing through technology, the digital strategy and so on. So that's something that should keep going through the next year, at least. So yes, we want to increase that -- improve that indicator. But, of course, we have some gaps here to cover because we don't consider part of the business that we do insurance and fees that comes in the x income. So part of what we have, we've got [indiscernible] in our case, comes as a [ex] income, not as fees. So that, in the end, creates -- potentially, we are not going to be in the same level as our peers, but doesn't mean that we are not making the same level of income by client as our peers, it's just that we report that in different parts of the balance sheet, right? So part of the fees, part of the [ ex ] income, but still having a good profitability with our clients, although the indicators are not going to show that directly because of the way we report the relationship with the joint ventures and the subsidiaries that we have, okay?

[Operator]

[Operator Instructions] 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 appreciate your attendance to the conference call and the questions, and we are available for further questions and clarifications. Have a nice day. 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.