Banco do Brasil SA

BOVESPA:BBAS3

Earnings Call Transcript 2022-Q2

[Janaína Storti, executive]

Welcome to the live stream session to discuss the results of the second quarter of 2022. Our event is bilingual, and we offer simultaneous translation into English. To choose the language just click in the icon in the right side of your screen, and select the language of your choice.

To start off, our CEO, Fausto Ribeiro; and CFO, Ricardo Forni will make a brief presentation of the bank's performance. And at the end, we will open for questions. We would like to remind the analysts the questions can only be posted through the webcast link. Here with us today is also Joao Carlos Pecego, Wholesale VP; Ana Paula Teixeira, VP for Internal Controls and Risk Management. Also, we have here Mr. Daniel Maria, Finance and IR Officer.

Now I'll give the floor to our CEO, Fausto so that we can begin.

[Fausto De Ribeiro, executive]

Thank you, Janaina. Good morning to all of you, and analyst and partners of Banco do Brasil for many years. Good afternoon for those of you who are with us from abroad. I think in Europe, it's already afternoon for you. This is a very special day for Banco do Brasil, because we are pleased to report another, very successful and positive results for the bank to reinstate the consistency of our brand.

I have a sort of slide that I would like to show it to you. And after my presentation, I'll give the floor to Ricardo Forni who will give us a brief presentation of the results. And after his presentation, we will open for Q&A. Please do not ask very lengthy questions because the experience shows that sometimes we get a little bit lost, and we miss the main focus of the initial question. So if you could please ask one question at a time. I would appreciate it.

Well, ladies and gentlemen, we are now presenting the results of the second quarter. And as such, the first half of 2022, we are reporting very sustainable results because we have a very robust portfolio and a portfolio with very good quality. Our net income grew 54.8% when compared to the second quarter of the previous year, BRL 7.8 billion. And speaking about the half year result, we posted BRL 14.4 billion, growing 44.9%. I mean and throughout the past quarters, it shows that we've been expediting the bank's dynamics also trying to close the gap between the bank and our private peers. And by looking at the numbers, you see that our ROE was 20.6%. This is some extraordinary work and also very sustainable, something that we are just about to show you.

We are back in the game. Our profitability is hand-in-hand with our peers, showing that we are very determined. We have great focus and with that, we can certainly reach extraordinary results considering that our portfolio by many of them who considered to be very defensive and we're talking about payroll-deductible loans, agribusiness and the delinquency rate is way below market levels. So our expanded loan portfolio reached BRL 919.5 billion, which is an increase of 19.9% when compared to the first half of 2021.

In terms of NPL, our NPL is well behaved -- despite there was a slight increase, but this is part of the strategy of the bank, which is around the National Financial system average is 2% and our NII, which is very crucial for us to obtain more significant results, we showed an annual growth of 12.2%, totaling BRL 32.4 billion in the first half of 2022 and fee income grew 9.1% in relation to the first half of 2021, totaling BRL 15.4 billion.

Strategy continues to focus on relationship, and accumulated administrative expenses grew 5.8% in the year, reflecting in our cost to income ratio that ended the period of 33.2%. And all of these results stems from our strategy that focus on relationship and personalized service through our network. It is also focused on the diversification of our network and constant improvement in customer experience.

So these are the main numbers I have for you today. And from now on, I will just refer to some of our business highlights and some of the bank's actions. And then Forni will elaborate further on each of these topics.

Our target is to become even more relevant in the lives of our clients, and we call this a partnership because that's what we want. We want a relationship with our customer's that is like a partnership. And also, there are some actions that being relevant in the first half of 2022. One of them is what we call grasshopper of the houses plan. Agriculture in Brazil is really significant. Brazil exports grain, beef. Therefore, Banco do Brasil is the largest partner in agribusiness. And this is very important because we contribute to the GDP of country and the Agro portfolio contributed with almost 20% of that. And then, therefore, we dedicated BRL 200 billion for agro business for the '22, '23 crops season. That represents a great effort on the part of the bank to look for different sources of funding. So as to have a very competitive rate considering, the profile of our clients and also to meet the needs of our growers.

Our credit lines represent less than 20%. So we try to merge resources from different sources, so as to have a more profitable plan. Also, we have Pronampe, which is the support to micro and small companies in Brazil. Brazil has always been a safe harbor to these companies, and we have resumed our leadership in this regard.

And this program with government funds operated by financial institutions whereby Banco do Brasil takes the lead, we were able dispose BRL 6.5 billion in just a few days in this last phase of the program. And therefore, we're able to serve 62,000 micro and small companies that are now eligible to use these funds to pay their bills or to make investments. And so after the pandemic crisis in Brazil, Banco do Brasil has been a leading organization in terms of the way we support micro and small-sized companies trying to offer credit to these companies and allowed them to meet their obligations. That involves a lot of conversation, a lot of credit analysis. That's why in terms of MSEs, we offer the best possible conditions. We usually say that Banco do Brasil's support to micro and small-sized companies have to save at least 3 million jobs in the country. That's why this was crucial to help our economy to remain resilient, preserving jobs and generating wealth to the country.

Since the onset of the pandemic, we estimated that at least BRL 200 billion or maybe a little bit over that have been invested in this segment. Also, we have the non-payroll credit line, and this is part of our strategy to invest in products that are more robust and more significant to the bank. Our portfolio reached BRL 92.7 billion, an increase of 34.3% and we are talking about salary personal loans, credit cards, et cetera. And all of that is part of the bank's strategy to increase its stake in non-payroll credit lines. That way, we could have a more significant profitability, reaching sustainable our sustainable goals. And certainly, that is followed by a very conservative credit model allowing us to be very safe in every step we give.

BB Securities, well, we resume our leadership in foreign exchange in Brazil when I took over the management of the bank, we rate 7 in this regard. But in our view, this position didn't make any sense to us because we are a leading bank in Brazilian agribusiness, 70% of agriculture production is exported. We also work in the -- every industry with large wholesale company, but also export the products and services abroad. Therefore, we calibrated our rates, and we look at the business as a whole and not just one particular transaction or operation.

And now we became once again leaders in the export exchange market, reaching USD14.6 billion with an annual growth of 67.7%. And early on today, we announced our BB Securities in Miami. They just signed a nondisclosure agreement and a letter of intent with UBS abroad. This will allow us to have a whole many of options to our private business, thus increasing our business potential, looking for more adequate solutions to our clients abroad. We also believe that this partnership that is not exclusive because we can also add other partnerships in due time, and we hope that this can give an important contribution to the bank, allowing us to attract more clients in this private segment.

In this continuous process of improving the experience of our clients, we are also investing heavily in our digital transformation. We are accelerating the digital transformation of Banco do Brasil. We want to have a bank that is closed, complete and also available to clients through its multiple channels, very digital in practice. We want to -- we say that this is a digital in practice. Just to give you some numbers, our customer base reached 18.3 million clients, an increment of 6.6% in the position vis-a-vis June of last year, 26.3 million active clients -- in digital clients, increasing 21.8%. 91% of all transactions conducted with the bank this half year somehow took place through the digital channels. This is a great number, which means that we are managing to engage our clients in this digital process.

In terms of our virtual assistance, they exchange the exchange information with our clients. And we were able to increase 166% the number of interactions. And WhatsApp up is to widely used by millions of Brazilians, and this is being used or over the country. And therefore, we decided to use WhatsApp to engage with our customers and also conduct business. We were the first bank to launch this option that whereby clients can adhere to the option of open finance through WhatsApp. This is then totally digitally. So through WhatsApp, they can consent to the exchange of the data from other financial organizations to Banco do Brasil, and we are also doing loan transactions through this channel into our supply 74% of all of the operations conducted through this first trial phase came from clients that never did business with us.

This is another additional channel that can also allow us to reach those that are not taking credit from the bank. We have the lowest NPS score. And all of that means that now Banco do Brasil is being referred to by our clients. They are referring Banco do Brasil to other clients. Therefore, the result had an increase of 8 points in our NPS score. We are very happy with that number. That means that our strategy has been successful, also increasing our profitability, taking the right offerings to our clients. And somehow, these clients believe in the bank. Our complaints ranking at the Central Bank has reached the lowest historical level, this also reinstate the fact that we are improving our customer service. BB closer, we are constantly thinking about rejuvenating our base. We've been constantly sitting -- it isn't positioning with the younger generations. We have just signed an agreement as part of a venture capital program with Yours Bank, Yours Bank is a Brazilian start-up as a fintech, and we have exclusivity in the segment with a purchasing option.

We can increase our stake further down the road, but this is a different bank because they focus on financial intelligence to educate youngsters towards having a more adequate take when it comes to finance. It focused on an audience between 14 to 27 years of age. And this is an agreement that has been signed and we firmly believe in this partnership because this can rejuvenate our base. And this will certainly allow us to support these clients from the early age and then be with them throughout their financial lives.

We also made important investments in some sound campaigns with the university audience, university students. We were able to grow 1.7 million university clients that now hold an account with us. They open an account during this past half year and this represents a 53% growth when compared to 2021. This also shows that the bank is trying to rejuvenate its customer base to allow us to be perennial.

We organized a major event in Sao Paulo called POVBB, Point of View BB. It's a very young event that has a different take on it, but the purpose is to interact with the young audience, understanding their views of the financial market, so as then to be able to offer them adequate solutions. And we are also investing in the gamer universe. We are present in the Metaverse through an agreement with Roblox. This will allow us to have a virtual arena, a banking branch -- and all of that will help youngsters to interact with us more often. This could be a bank of their choice in the future. Therefore, we are trying to position the bank amongst this younger generation, okay.

Here the main objective was to enhance our participation in this new ecosystem or ecosystems that came about after this technological transformation like open bank or the finance. Now we have a new competitive space. And in order to be part of that ecosystem, we launched a new digital platform called Liga PJ. What is this? This is a new type of information, and we try to attract micro and small-sized companies in the country, offering training, helping them to lead their businesses with improved management or even to expand their businesses. This is a hub of solutions cater to the needs and desires of Brazilian micro entrepreneurs. This is just the beginning, and certainly, this will evolve to become a small marketplace that will help us increase the number of solutions offered to micro and small-size entrepreneurs.

We have our marketplace, the famous Banco do Brasil store launched last year, last October. And today, we already have 27 major brands of retailers interested in accessing our large customer base. And you saw 24 million clients that access the Banco do Brasil happen almost 10 million clients access our app on a daily basis. That means that there is, a huge number of clients that could possibly also access the marketplace.

And we already have agreements with 27 major retailers offering customized products or products that they have in their own stores, offering differentiated prices and cash back to attract more clients. The store -- the BB store is still gaining traction, but more than 430 million transactions were made reaching 4 million clients. We are very excited about this platform.

And now speaking about benefit platforms, we consolidated everything into a new platform with better usability all of the benefits that somehow the bank already made available to different means are now in a single platform. And we are talking about a relationship program. So the more relationship the client has with the bank, the more benefit it will years -- you will have. This is a way to return part of our profitability to our clients. And in terms of cash back alone since the creation of the program, we already gave BRL 300 million in redeemed cash back.

Well, what's good is now even better. You know that our app is renowned in the market received many awards. It has great usability, very user friendly, but we are in constant evolution. Therefore, we decided to invest a bit more in this tool. And we made it even better now it's called the super app of Banco do Brasil, a new portal, more colorful, as you can see, more user-friendly. Therefore, we are constantly trying to improve customer experience, making it more modern, simplify, agile and intelligent, allowing our customers to have a better value at a perception.

In terms of our engagement and sustainability, we are totally committed to that approach. Our portfolio is audited by external parties, and we reached BRL 292 billion in credit. This is very positive in terms of having a sustainable loan portfolio. This represents a 13% growth vis-a-vis the formal position. We also conducted a major -- credit event called Global Carbon Market Congress event took place in Rio de Janeiro. We brought in people from the market and also large companies that operate in the country who are also our clients. Those are the company and also legislators who will drop the loss related to carbon credits, meaning that we are very much involved in those costs. And as we have a bank with 60% of all agribusiness transactions in the country, we can certainly lead this sector and be protagonist in this carbon credit market, which is opening up to us right now. We already have 70 operations ready to be closed in the market. And Banco Brasil as a leading Agro Bank is ready to help those who can benefit from carbon credit and also, we are here to help companies that need to compensate with their emissions.

We are also looking at funding opportunities related to sustainability. And to that end, we just announced this partnership with the World Bank. We have BRL 500 million already in funding EUR 100 million already in funding from the French Development Bank and BRL 200 million at NDB, which is the BRICS bank. Our BB for her, we started BB pra Elas in March. We have major objectives behind this solution because it allows women to engage more and female entrepreneurship, the amount of BRL 5 billion invested in micro and small size company, BRL 2.6 billion were earmarked for entrepreneurial women, 24 companies led by women.

And we try through BB pra Elas, we offer education, training solutions to problems that usually a micro and small size companies don't have. We already trained 14,000 people throughout this process, of which 9,000 are women. And somehow, we are ready to offer other types of solutions in this platform like female well-being and marital visits through telemedicine. And as of last year, we launched a campaign initiated by the Association of Magistrates in Brazil that aims at fighting violence against women, domestic violence in the country.

And since then, since June 2021 up to June of this year, there were 19 cases or 9 women that were protected through Banco do Brasil's initiative, this wonderful campaign that aims at protecting women. We have more than 30,000 employees participating in this activity and prepare to help women in situation of risk. All they have to do is to signal through the lipstick or some sign written in pen, and we bring them to a protected environment and then we call the permanent government officials to grant protection.

We have intensified more and more our work in Banco do Brasil foundations and they carry so transform the lives of people. Here is some highlights in the social investment we've made. Looking at the last 10 years, we had BRL 2.7 billion invested in social projects with from not only from the bank, but also engaging our partners and clients who are willing to use the foundation to take education, health and all thing to the needy population. In the last 10 years, we had 6 million people served, and we've been acting and operating this initiative in more than 2,000 cities in Brazil.

Lastly, I would like to end my part, talking go about how we generate value to society. Our DVA, that's the value that we add to society of almost BRL 37 billion, up 31% when compared to last year. So how do we return value to society, by paying our taxes, our fees, investing in our people, paying rent, paying being dividends to our shareholders. So one way or another, we are giving back to society, making the economy turn generating jobs and income in this country.

This is what I had. And now I'll turn the floor to Forni to detail our financials.

[José Ricardo Forni, executive]

Good day, everyone I'd like to thank CEO Fausto and I will start the presentation with the highlights of our earnings. As mentioned by our CEO adjusted net income in Q2 '22, plus the quarterly growth of 18%, ending the period at BRL 7.8 billion. This result was supported by the strong growth of the loan portfolio, which totaled BRL 919.5 billion, with good performance in all segments in nonperforming loans totaling under control at 2% below the average of the Brazilian financial system.

NII, net interest income and fee income recorded quarterly growth of 11.2% and 4.3%, respectively. Administrative expenses remain under strict control, growing 1.3% in Q2. We also recorded a cost-to-income ratio of 32.2%, the very best in our historical series, resulting from consistent business generation and discipline in cost management. Last year, we ended June with a robust common equity Tier 1 of 12.49%.

And now moving to the next slide, we detail or quarterly and half yearly evolution of adjusted net income that totaled BRL 13.4 billion in the second -- in the first half of 2022 ended the quarter with an ROE of 20.6%, up to BRL 7.8 billion. And that's in the 19.6% ROE for the first half of 2022. With that, our profitability which have been increasing quarter-by-quarter, close the gap and is now at the same level effect of private peers in the country.

The expanded loan portfolio exceeded BRL 919 billion, up 19.9% compared to June last year and 4% quarter-on-quarter. The sustainable business portfolio, which exceeded BRL 292 billion in June represents 31.8% of the loan portfolio expanded view. Individuals portfolio grew 14% over June 21 and 2% quarter-on-quarter, driven by the positive performance in payable rooms, consumer credit and credit card, in line with our strategy of origination with better risk-adjusted return.

Still in the individual segment and in line with our long-term commitments to sustainability, we launched a loan facility for electric and hybrid cars and grew our renewable energy portfolio by 22% in the quarter. In SMEs, we observed a 17% annual growth and a 3.5% quarterly growth in credit for micro, small and medium-sized companies. While the loan portfolio for large companies grew 25% and 5%, respectively. With our highlight going to operations with private securities and guarantees and the loss of the agribusiness portfolio was BRL 262 billion, growing 27.3% year-over-year and 3% quarter-on-quarter. The firms that go to sustainable agriculture represent 46% of this portfolio.

On the next slide, we present the evolution of ALLL in the expanded concept, which ended the quarter at BRL 2.9 billion. In the quarter, ALLL was BRL 5.7 billion, up 5.6% comparing with the same period of last year. The highlight goes to the strong results of recovery of write-offs totaling BRL 2.1 billion.

On Slide 18, we talk about credit quality. NPL over 90 days in the third quarter, at 2%, a gradual increase of 11 basis points in relation to March '22, remaining below the Brazilian financial system. We still don't have statistics disclosed by the Brazilian Central Bank, but we have your projection. Default indicators have proven to be resilient with stability in the SME segment, a drop in the Agribusiness segment and as we have already commented an increase in the segment of individuals. This behavior is in line with the strategy of changing the origination mix and is expected. The coverage ratio ended the quarter at 271%. The new NPL over the loan portfolio reached from 78% with the coverage of the new NPL reaching 74%.

On the next slide, we present the net interest income, NII, which posted an annual growth of 12.2%, totaling BRL 32.4 billion in the first half of 2022. Quarter-on-quarter, the highlight was a rise in revenues from loan operations benefited by growth in the loan portfolio and its repricing in addition to deceleration in the increase in the cost of funding. We also observed a higher treasury result, up 27% on the back of the growth in the fixed income securities portfolio and higher Selic rate.

Net interest margin, NIM, posted an increase of 30 basis points and ended the period at 3.8%, reflecting the good performance of the NII. Fee income totaled BRL 15.4 billion in the half year, up 9.1% year-on-year, mainly influenced by the commercial performance of asset management run by our BB asset, pension funds and loan operations. Administrative expenses extended yield grew 5.8% in the year below the inflation rate for the period, reflecting our strong discipline in cost control.

On Slide 21, we present our common equity Tier 1, CET1. It was 12.49% in June, mainly impacted by the RWA increase by virtue of the portfolio growth, which was partially offset by higher retained earnings in the quarter. On the next page, we present the corporate projections for 2022. And here is the performance presented in the first half of the year and to better represent the management's expectation Banco do Brasil has revised its corporate projections.

In the loan portfolio, we increased the estimates for growth in the portfolios of individuals, agribusiness and SMEs, considering the excellent performance up to June and the positive outlook for the second half of the year. But this, the rate for the loan portfolio expanded view adjusted for growth between 12% and 16%. We have also revised the range for net interest income to 13% to 17% in order to reflect the better-than-expected performance in loan and treasury operations. Fee income was revised to be 16% to 19% range, reflecting diversification and good performance.

We increased the projection of ALLL expanded view to BRL 14 billion to BRL 17 billion and this there was a reduction. A relevant reduction in the remuneration of time deposits I just want to understand if there is any new strategy by the bank regarding that -- after and maybe Daniel can help me.

You will see that the reduction in the cost and expansion in volume occurred in a more disseminated way, not just in time deposit. This was diligent work that our financial area performed in the pursuit to expand and diversified funding and reducing costs. As regards to the expansion of time deposits, we have been acting both commercially in the product itself and in the offering of this product is an alternative to re-innovate the balance in the checking account.

So these are basically the 2 lines of what we did in terms of funding, which expanded our funding and the diligent work that we had of reducing costs in all segments. You can see that savings is a reflection of silicate, but funding in LCA and other models and also quite deposits also reducing relative costs. It is natural with the current interest rates that there will be a greater demand for fixed income. And we have a retail-based funding. So this is basically the retail strategy that we put together considering this moment in the market.

[Janaína Storti, executive]

Our next question is with Marcelo Telles with Credit Suisse.

[Marcelo Telles, analyst]

Excellent results congratulations and a record net income in the quarter. Congrats. My question is regarding the sustainability of this return. We had an ROE that was quite high, above 21% the bank benefiting from deposit margins. So you revised the guidance. So my question is, how can we think about these results? How sustainable are them for next year?

[Fausto De Ribeiro, executive]

Excellent question, a question that was also asked by the journalist earlier today so how did I answer that? If we stop and observe perhaps with a more long-term view in recent years, the results of the bank have been improving. You can absorb that if you look at the historical series of our earnings. In recent quarters, what have we been doing at Banco do Brasil under the new management particularly, we have been focusing on a very clear and objective plan probably over the company. We have been focusing on those lines where we were not having a leading role I mentioned, foreign trade of the business, small, medium-sized enterprises. And the result came, we have been growing consistently.

This result is also supported by credit models, which are extremely robust and conservative Ana Paula is here. She is our Vice President of this management and internal controls. So the bank has always adopted a more defensive portfolio position. We call this defensive because we have a lot of operations with low-risk segments. We have a high concentration in payroll loans, high concentration on agribusiness that reduced 0.6% to 0.4%. The position -- so we have a solid portfolio position in a defensive approach. And now what we are doing is taking one step forward at a time in a controlled fashion, trying to improve our NII so that we can have a better ROE.

That was lessons learned from other American banks because we have been growing consistently with a lot of responsibility and conservatively. Now of course, we will be observing the growth of and because our risk and return move together, and we expect the return will be -- rewarding to meet your expectations and so the risk will always be under control. You can observe that our coverage ratio continues very high at [ 270 something 271. ]

So that gives us that extra buffer so that we can broaden our strategy in those higher profitability lines, non-payroll loans, credit cards, you can be sure that these results are sustainable. They have come to say what we are doing in the bank is stimulating our network more and more. We want to be very close to our customers. We were the first bank to resume physical visits, face-to-face visit. I together with Vice President believe that being in proximity with the clients, we can understand their needs better. We can be closer to them we can engage our clients more with our products and services. In a nutshell, the results have consistent. You can expect growing in consistent results and sustainable results for the coming quarters.

[José Ricardo Forni, executive]

I would just like to Fausto, something. Because these are words, which is fundamental. You talked about consistency. We have been executing a strategy that is very consistent. And that is evolving over time. We got where we got in the second quarter, but by chance, not due to a nonrecurring event. No, definitely not. We have been working hard to be closer to our clients to expand the business, to mobilize our sales force controlling costs, growing the portfolio with dedicated risk control. And this is the work that is going to take us forward and to maintain our performance among the very best in the industry.

We had a gap. We closed the gap and now we are delivering performance compatible with all the best peers in the market. This is the take-home method. For 2022, we revisited our projections. So what we expect to deliver until the end of the year has been explained here. And this strategy has been revisited all over our competitors are also trying to evolve a constant evolution in delighting our clients. That's the reason why we exist. This is what we're doing. And for 2023, we will be looking at the economic scenario and what we can expect in terms of portfolio growth and several other initiatives that are underway to deliver performance in line with the best performance in the industry.

[Ana Paula de Sousa, executive]

Can I just add a point to what Fausto and Forni said, this management under Fausto's leadership made very clear our strategy to be customer-centered. The healthier networks, retail and the government got very close to our clients with the full support coming from the areas of technology, loans, risk, the operating areas, all of the areas work together so that this network could have all the means necessary to have that proximity. So, when you refer to proximity, we call that the perennial results because this will allow us to maintain the relationship we have with our clients.

This is a successful strategy, a winning strategy where we focus entirely on the client and that also has the engagement of our entire staff. So, not only we are posting sustainable results, we are certainly maintaining this customer-centric view. And with that, we will be more perennial. And in line with that view of being customer-centric, I'm also like -- I would also like to refer to the resilience of our portfolio. 92.13% of our portfolio is in the best risk levels possible. And this risk model also brings about resilience in origination of our portfolio. And this sustainability comes hand in hand with this proximity with our clients.

[Janaína Storti, executive]

I will now move to our next question from Geoffrey Elliott, Autonomous.

[Geoffrey Elliott, analyst]

The translation might have had a bit of a lag, so sorry about this slow coming in. My question is on the ALLL expense guide for BRL 14 billion to BRL 17 billion for 2022. So, if we take the first half, that was BRL 5.7 billion, the second half implies between 8.3% and 11.3%. And at the high end of the range, that's very nearly double the run rate of the first half. So, even at the low end, it's nearly 50% higher. So, why are you expecting such a big increase in provisions in the second half relative to the first half of 2022?

[José Ricardo Forni, executive]

I will start and then I can have some extra information from my colleagues. I think that one thing in the first semester, we are still seeing the, let's say, what was the end of the pandemic, let's say, evolution of the portfolio. And considering this, let's say, ending this phase, we have been from low NPLs, and we are -- because we are adding risk to the portfolio, this -- we have seen this increasing on the margin. But in the first semester and this quarter in particular, we have ended, let's say, the proposed classification or worsening in terms of the portfolio at the beginning. What we have the provisions during the pandemic. And now we have been for these 2 years following the returns on the portfolio. And now we released the classification. So we have, at this quarter, the end of this process, this implied recognition of improvement in the classification. When you see the letters of our portfolio, you can see some movements into the AA, A, B, C and other ratings over there. And this is the, let's say, the end of this phase.

On top of that, we have this -- we have been adding risk to the portfolio and then the expansion of our prognostics of evolution portfolio in the different segments, especially the retail portfolio is deteriorating, let's say, the quality at the pace that we have been looking very closely. So -- and then on the company's portfolio, we have a stable NPL and in the agri business portfolio, we have been improving the NPLs. So, all this dynamic when we are looking for the second semester, we have been expecting -- we are expecting that the level of provision will come back to the levels that we used to have before the pandemic. So, roughly 5 -- a bit more than BRL 5 billion per quarter. So, that's why we are, let's say, adjusting the range. And why we move the range right now is because the portfolio is expecting the growth that we foresee initially in the year. So -- but now, I would say that the better guess would be the mid-range of this -- of the new range that we are showing to you today.

[Fausto De Ribeiro, executive]

If I may, just to make some additions. When you observe the performance of the provisions in the first half of this year, we had a very good recovery and this combined with less discounts. And certainly, this combined with the effect of assessing the risk of the portfolio that Forni mentioned brought us a lower provision compared to what we expect. It's not necessarily we are going to have these replicate in the second half of this year. Then this tends to normalize. And consequently, what we are expecting was to have provisions in the region of the upper part of the former guidance. What we made was just an adjustment in the guidance in a way that our expectations is in the mid-range of the guidance. Basically this.

[Ana Paula de Sousa, executive]

And that's going to be support the growth of our portfolio.

[Fausto De Ribeiro, executive]

Yes, important, important, the growth of the portfolio that Forni mentioned.

[Janaína Storti, executive]

Gustavo Schroden, Bradesco.

[Gustavo Schroden, analyst]

Forni, Ana Paula, Daniel, Janaina, thank you very much for the question. And congratulations on the results. I have a very direct question related to dividends. You have a very strong capital position with CET1 high. And I think you're generating capital in a very strong way. Is there any possibility of increasing your dividend payout, considering the very high ROE and a high capital base?

[José Ricardo Forni, executive]

Gustavo, thank you for your question and for your [ price ] related to the bank's performance. This question came about this morning, and I said that certainly, we're constantly reviewing our policies. At the moment, we believe that our payout is adequate. In keeping with our peers and on occasion even lower than what the bank is currently paying. Capital preservation can also allow us to ensure that we have a very robust capital to support the growth of the assets that we are suggesting in our guidance. Right now, we believe that the 40% payout is more than adequate and also in keeping with our peers and we are paying that in 8 installments. So somehow, we believe that we are meeting your expectations when it comes to the frequency of payments. we are always alert to whatever comes in the market and whatever is new in the market. And so any other policy and if there is any relevant fact that would lead us to review that, we'll certainly do so. But currently, we believe that our payout is adequate.

[Fausto De Ribeiro, executive]

Gustavo, just to add, I believe that -- I mean, we've been provoked about this topic because of the demand from the government to all state-owned companies. And we are just following the plan to the dot. We are increasing our portfolio. We are increasing above the expected levels in this equation with a 40% payout, which is certainly adequate and very attractive and follows best practices and 60% profit retention to support credit growth and the growth of all the other businesses of the bank. So at the moment, this is certainly the most adequate mix. This push towards a higher payoff is here, we will always evaluate it. And looking at the year of 2023, I think now is the time to review what lays ahead in terms of growing the portfolio or growing into new businesses will allow us to say whether it will remain as such or whether this payout could be optimized somehow. But planning at the end of the year and the execution and results delivery I think it has been very good to investors and also adequate to the bank. We recently evaluated that.

[José Ricardo Forni, executive]

Gustavo, I think the best way for us to meet the desires of our shareholders is just to post better results. So as a consequence, the payout will be certainly better at the end of the year and that's why we just had a new projection about the figures.

[Janaína Storti, executive]

Our next question comes from Mario Pierry from Bank of America.

[Mario Pierry, analyst]

Congratulations on your results. I do apologize because my camera is not working. My question refers to cards. We saw that you posted a very strong growth in credit cards, over 50%, but we also see a very steep increase in delinquency levels. It's close to 8%, at a year ago was 4%. I just want to understand whether the appetite to continue to grow has changed. And whether this delinquency increase is something that was expected or something that needs further improvement?

[Fausto De Ribeiro, executive]

Well, I will start answering your question and then my colleagues will add. In our last earnings release call, we also referred to the importance of working with NII, net interest income or looking at lines that are less defensive. I think this is how you call it, less defensive. or lines that are more profitable, but by the same token, would produce adequate results that could compensate for some occasional delinquency or increase in delinquency. Banco do Brasil has highly qualified credit models.

They stem from a lot of investment in seeing how it evolves and we learned a lot throughout the years. I've been asking our VP for Risk and Control that we have to release things and learn as we go, giving one step at a time. Therefore, we are constantly learning, we will continue to grow in some lines that present a higher NII and low risk. Therefore, as I was saying, it's a continuous learning curve. And as we move forward, we make adjustments to our model. We are -- we have to be posting more consistent models with a higher assertiveness level. And I think that Ana Paula can give us more details about how the process is evolving.

[José Ricardo Forni, executive]

Let me just make a brief comment before I give her the floor. Well, first, credit cards. This is a product that is very relevant to us and this is important when it comes to our change in the mix. Brazil took some time to enter into what the market calls the open sea and this market has its own peculiarities. There is an evolution that we clearly see in terms of incumbent clients or our long-time account holder whose portfolio is very adequate. But now we've been attracting new clients. And with these new clients, we are using a new approach. Therefore, clearly, this audience has a different profile, different NPL levels and the speed of which NPL has increased, it was anticipated vis-a-vis our expectations.

Our credit risk management is very qualified and robust. This was quickly perceived and it's now -- it's now the time to adjust our credit models, which we have done and even the evolution of limits throughout the clients' journey with the bank has been adjusted. This involves continuous fine-tuning just to maintain the quality of the portfolio as a whole to adjust it to the current moment and align that to our projections and issues where inflation and available income is impacting NPL in the market as a whole. Therefore, this is the reality we see right now. And we are continuously monitoring our credit risk portfolio.

Now, I'll give the floor to the expert in the subject.

[Ana Paula de Sousa, executive]

Mario, I think both our CEO and CFO, they talked about issues related to our strategy. This card delinquency reflects our strategy to seek for more profitable line items. And certainly, this card line delinquency sometimes occurs faster when compared to other products because sometimes people delay payments, et cetera. We are now looking at the market as a whole. We entered into this market. And as Ricardo said, this is an open sea. We are now seeking for new clients or non-account holder clients and we are also revisiting our own models. We already deployed measures to that end, using a lot of data from different data brewers because all of that will help us find a balancing point. Not only that, we have a very winning collection strategy. We are certainly pursuing our strategy to look for more profitable lines. We know that this involves more risk, but our risk models are constantly monitoring the pulse of the market and helping us to take the necessary measures as we have been doing in regards to that line of credit.

[Janaína Storti, executive]

Our next question comes from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

I'd like to ask about your NII, good growth there. You increased the guidance, certainly had benefited, I guess, from a combination of strong loan growth, a better mix and higher rates. Just to think about perhaps going into next year as well, loan growth seems to be slowing down for the rest of the year, not sure how much visibility you have till next year. But how should we think about your NII growth beyond this year, depending on loan growth, if rates maybe start to come down next year, could that create some pressure? Or do you think because of the better mix, you can still get the margin expansion?

And also just one other point on the treasury income, you have very strong results there. Some of the private sector banks, I know it's not fully comparable to that market NII, but basically they're having some trading losses. You seem to be doing very well on the treasury income. Just to help us think about that also combined with the evolution of interest rates from here, if that comes down -- should that come down at all? Just help us think about the sustainability of this NII growth?

[José Ricardo Forni, executive]

Okay. I will start here and Daniel Maria can add on that. I believe that we are still seeing the improvement in NII not finished. So, we are expecting the growth in the NII and that's why we adjusted the guidance on that. I believe probably we will reach, let's say, the highest NII in terms of -- by the end of the year when we have all the strategies that we are doing in terms of looking for the highest this improved risk return portfolios on the retail side on the individuals. We have been working, let's say, on the cost of funds on all aspects in all the products of the funding. And I believe that this will still evolve over time until the end of this year. And we have -- I believe that on the agri business, I believe that the new harvest, we will have slightly lower spreads on that that will affect over time the NII as well. But I believe that for the end of this year, we still see the NII improving. And for 2023, I think the dynamics will evolve as well. We believe that the treasury results, we will still be there. And we need to see how we will evolve on the credit portfolio in 2023. We don't know let's say, the numbers yet, but Banco do Brasil will try to be, let's say, very close to what the peers will be evolving in terms of the credit portfolio over there. It's a matter of seeing what will be the scenario that we will be facing at the end of this year to plan for 2023.

[Fausto De Ribeiro, executive]

And Tito, just adding some thoughts to what Ricardo mentioned. Probably it's interesting just to analyze the structure of our balance sheet. We have basically liquids or net position of assets at fixed rates against net positions of liabilities at floating rates. The difference is that this net position is at saving deposits remuneration. That is basically TR plus 6%. When the Selic rate is above 8.5%, it means the liabilities move faster compared to the assets. They reprice faster. But they have a cap.

They have a cap when the interest rate is above 8.5%. This is one of the reasons why our liability even though is growing when you compare to the base rate, is reducing relatively because we have this gap. Let's design a scenario when the interest rate starts to go down. We are going to reprice liabilities faster and assets is lower and exactly -- and this gives the dynamics for next year that we believe -- we strongly believe that NII tends to grow above the credit portfolio.

And just to take this opportunity to remind one of the drivers for NII this year, certainly, cost of funding, repricing of transactions is exactly what I mentioned about the assets in treasury, and -- but do not understand treasury as the concept of treasury. The way we report this, we have some transactions there, for instance, the corporate bonds. We have CDCA. We have CPRs. That is basically commercial transactions that is there. In a reduction of interest rate tends to reduce the participation, but is still above the growth of the credit portfolio. I think that is a good assumption to consider in the models.

[Janaína Storti, executive]

Jason Mollin, Scotiabank. Jason, can you hear us? Sorry Jason, we cannot hear you.

[Jason Mollin, analyst]

Congratulations on the strong results. Return on equity of 21%. I would like you to give me more color on the dynamic of the agri business segment. Agri business accounts for about 28% of their portfolio with the segment growing 27% year-on-year this quarter. In the guidance, you talked about growing credit to agri business of 18% to 22%. That range for the entire year of 2020. Is this a guidance for the next half year? Could you speak about your expectations, midterm expectations of growth, delinquency and profitability of this segment? Thinking more about the competition and how subsidies will behave in the future.

[Fausto De Ribeiro, executive]

Jason, since we took over the management of the bank. I have been saying over and over again that we have to return to being a leader in some strategic alliance with the bank. And agri business has been a vocation of this bank for more than 100 years. The first agri business operations date back to the 19th century. Financing, production of coffee in Brazil, sugarcane and so on. So, agri business was born in Banco do Brasil. The first big loan portfolio in agri business is from Banco do Brasil dated the 1930s and the main role of agro loan adopted by the bank was one in 1954-'55 at Banco do Brasil. It is now a standard for all banks. Well, having said that, I think it is undeniable the knowledge that we have with the Brazilian agri business and our capability to serve agri business from small to large growers. I said in the beginning that less than 30% of what we are directing to agri business comes from what we call funds with equalizable interest rates with the federal government. The remaining 70% is our effort of putting together funding to offer a better rate for the agri business.

And talking about the agri business, it has been in a boom. We can see that the population is growing around the world. The world is growing strongly every 10 to 12 years, increasing the number of people by 1 billion. So more and more, there will be a growing demand for food and the Brazilian agri business can be an important solution for us to export more and more. We have fertile land. We have technology. We have Embrapa that supports the technological development of the agri business. On the other hand, have a pressure to prevent deforestation. So, there's only 1 way of doing this. Having a better return, winning technology to the people in the rural areas so that they can use their land to produce even more than they produce today. The demand that we see has been strong at the cost level. The cost of planting the seeds and growing soybean, wheat, corn and so on and so forth. So, this is money for the producers, the growers to buy seeds to buy fuel to plough the land, to buy fertilizers and manure. In other words, to make their crops plant and harvest.

But we can see clearly is that because of inflation in a agriculture machinery, machine used to cost BRL 300,000 in Brazil. Now their cost went up to more than BRL 1 million. So, there's a high demand and little supply. We also have a supply chain issue of chips, tires that come from abroad. So, there has been an interruption in the supply chain of some countries. And if this causes a delay, we believe that these issues will have an impact on the crops. But the agri business will get a lot of strength and momentum in terms of the costs, what I mentioned, planting the seeds. We can witness the strength of the agri business. In this first month when we opened our operations to give you an idea. Well, in the first month of last year, we had about BRL 11 billion at the start of the season.

We have done some BRL 27 billion so far this year. So, agri business is very strong. It proves the strength of our agriculture. We have new entrants in the market, new investments being made and the expectation is that growers will become more and more capitalized because of this commodities boom. And delinquency rates are expected to remain stable. We are also offering alternatives to the growers so that they can have a future sale of their production. We created some options in our website and in our app so that they can hedge their future price.

So, they won't really depend on spot prices of the market. We also built 4 laboratories to develop technology. One of them geared to the agri business here in the region of the countryside of Sao Paulo, where we have a very strong and active university in agriculture. We have a lot of agritex. That's the technical name we give to startups that work in agri business. And the idea is that we are going to look for more and more smart solutions so that the agri business will be sustainable, improving and increasing productivity in the future.

In other words, the bank doesn't want to be just a credit solution partner. We want to bring the agri business intelligence. We are developing these labs with very interesting solutions so that growers can use those to increase their production, reducing the credit risk for the bank more and more because of the technology, because of the information in helping growers be more profitable. So, this is what I had to say about the agri business. If you wanted to have more color on the other business, this is exactly my perception.

[Janaína Storti, executive]

Our next question is by Nicolas Riva with Bank of America.

[Nicolas Riva, analyst]

My question is, if in your views, calling the 9.75% is subject on issuing a new perp? Or if you think that even without replacing this perp with new AT1, if you still feel comfortable with your capital ratios and you think you would get approval from the Central Bank to call that bond? And then maybe I'm just going to make a second question. Besides the perpetual bond in April, the call date, you also have maturities of senior bonds and legacy Tier 2s. And in total, through April, you have $3.9 million in debt maturities, this include also the perpetual bond. My question there is, if you think you have enough dollars to meet all these payments? Or do you have any dollar funding needs to make these payments?

[José Ricardo Forni, executive]

In terms of the perp, we are following all the, let's say, the situation in terms of the market. I believe that the -- so the treasury market that has increased very quickly the interest rates. We are monitoring the, let's say, the situation in terms of new issues. So, we are very -- but we are very, say, well prepared in terms of dollar liquidity even with the senior bonds that you told us about. So, we have been anticipating all this, say, following maturities and we can manage easily the dollar liquidity and the capital position. We are foreseeing the perp in terms of, say, as expected by us in the beginning to exercise the call.

And then we will see how the market will be to a new issue, either offshore or on the onshore market. So we will monitor this, but we have been looking at this very closely, we're quite, say, we are very okay in terms of handling either the dollar liquidity position in terms of the renewals and also the capital position. And this is a part of what we consider when we see, for example, the payout discussion. So, we are handling the capital position looking forward in terms of all the scenarios, let's say, at least for 2 or 3 years in terms of maturity. So Daniel, if you can add on that.

[Daniel Maria, executive]

Yes. Just to make some additions, Nicolas, and to give some data to help you to make your judgment. First of all, we have more capital, more additional Tier 1 that is necessary in our capital structure. Currently, we have about 300 basis points -- and easily, we can reduce these at least in 100 basis points. And it means that [ $5.5 billion ] that we have maturing or callable in '23 and '24, it's very likely that we're going to have less than we have. An additional information, when we built those positions, we have different demands in terms of foreign hard currency. And we had also a different perspective in terms of capital. What was our concern.

At that time, we saw all the market cleaning the capital or changing the capital we want to anticipate in this process. And at that time, we didn't have the domestic market. And currently, we have. If you ask me if I would build the capital structure from scratch, probably we're going to have a mix between domestic and international markets. This means that we have other opportunities and possibilities to finance this. Then in terms of capital, it's basically this. We have sufficient capital, and we tend to reduce this position. In terms of liquidity, we prefunded those positions and our balance sheet reduced in terms of hard currency, then we don't have the same need of funding. Then we expect to have a lower amount of bonds in the market in the near future.

[Janaína Storti, executive]

This is the last question. I'd like to invite Pedro Leduc with Itau.

[Pedro Leduc, analyst]

Congrats on your results, President Fausto and your team. My question relates to cost reduction and the efficiency -- well, you reached a great level of efficiency to be more competitive. Now your line of admin expenses did not change from the guidance. This alone is a challenge once inflation was higher. But, I just want to understand going forward to 2023, whether where expenses with credit provisions could be higher? Could we understand this trend and whether this continues or whether this will have a positive contribution to the numbers next year?

[Fausto De Ribeiro, executive]

Pedro, excellent point. We talked a lot about that in -- with the Board of the bank. And this is the message that we want to convey to the market and to all of you. The culture within Banco do Brasil in terms of expense controls, is here to say. This is part of our DNA, and it's ingrained in the organization. We've been doing that for many years. And the message is that we will continue to control costs diligently. That's why we didn't increase our guidance. It is a challenge and we are aware of that because we have a collective bargaining agreement and coming in the second half of the year and there is also inflation on rents, et cetera, and this will certainly incite us to exercise our negotiation power and also to find more adequate and fair solutions. And I hope that we continue to keep our expenses very much under control. I might say that this is our major challenge, but also something that, in our view, is very feasible and that's why we maintained our expense levels at this level.

[Janaína Storti, executive]

Well, we now conclude the Q&A session. Thank you so much for joining us today. And now I will like to ask our CEO, to make his final remarks.

[Fausto De Ribeiro, executive]

I would like to thank you all very much. Thank you for joining us today and for being with us during our results presentation. I would like to reinforce that this is a very sustainable result based on the robust growth of our portfolio but by the same token, having our NPL under firm control. The bank has robust credit models. The bank has a long-time experience in the market. We are present in all corners of the country. The bank is very sound. The bank has extremely good experts in the field and very qualified to manage the company to innovate, to renew our base and to rejuvenate our customer base. I mean, there are a series of actions that we are putting into place to move forward. This agreement with [ U.S. Bank ] is something that, in our view, could bring onboard many future clients to us. And by the same token, this will also contribute to the society in general because we will be able to educate the youngsters so that in the future, they can also be with us in their financial journey. We are looking at many different ecosystems, some unique opportunities that came about in the market.

We look at open finance and open bank as opportunities rather than threats. Therefore, we are benefiting from a lot of the innovation using a lot of analytical intelligence. We are thinking outside the box, trying to innovate and to be more assertive in our offerings to our clients. We are also noticing that clients that decided to allow us to get information on other banks, in these cases, the offerings are even more assertive. This involves analytical intelligence, some convincing work and also the fact that it's important to be close to our clients.

If you can benefit from that in different fronts, the bank will become even more sustainable. So, this result is here to stay. This management is very resilient, has a lot of focus. We are very objective. We have very clear objectives that have been extensively communicated throughout the bank. People know exactly where we want to go. And in the bank, people feel like they belong to a company that is over 200 years old. And rest assured, that we will be constantly surprising the market, not only presenting more adequate solutions to our clients, but also posting more consistent and sustainable results.

Thank you all for your attention and continue counting on us for everything you need. All the best to all of you.