Banco do Brasil SA

BOVESPA:BBAS3

Earnings Call Transcript 2023-Q2

[Janaína Storti, executive]

[Interpreted] Good morning, everyone. I am JanaÃna Storti, Head of Investor Relations of Banco do Brasil. Welcome to our live streaming on the results of the second quarter of 2023. Our event is going to be held in Portuguese with simultaneous translation into English. To choose the language click on the right side of the screen and select the language of your choice. To start, our CEO, Tarciana Medeiros; and our CFO, Geovanne da Silva will present the results of our performance. And at the end, we will have a Q&A session.

We would like to remind the analysts that questions can only be asked using the webcast link. Also here with us our VP for Internal Control and Risk Management, Felipe Prince. I will now turn the floor to our CEO, Tarciana, to begin the presentation.

[Tarciana Gomes Medeiros, executive]

[Interpreted] Good morning, everyone. Thank you very much for being here with us in our second quarter 2023 earnings live streaming. This is an important opportunity to discuss our business performance and perspectives. Our net income in the second quarter reached BRL 8.8 billion, up 11.7% vis-a-vis the same period last year, and the half year, our net income was BRL 17.3 billion, 19.5% higher. This relevant performance proves the success of our business guidelines and follows increasing results, showing our discipline in complying with our strategic planning.

If you track our management, you know what to expect from our performance. Our results and the close relationship we have with clients each quarter support this trust. The bottom line number on the balance sheet is important to us. However, even more relevant has been the company's consistency in achieving its results. The performance of several business lines contributed to the quarter's net income with highlights of the credit offer, which was up more than 13% in 1 year, amounting to BRL 1,045 billion. Note that the significant growth of the loan portfolio was followed by adequate risk management. Delinquency over 90 days stood at 2.73%, again below the financial system average. I also emphasized that the strength of our coverage ratio, which remained above 200% was a great result. We continue to grow our loan portfolio sustainably, supporting a number of sectors in the company.

Our portfolio expansion is still one of our main strategies as we maintain the right balance between our clients' needs and the appropriate capital remuneration. Our result also includes contributions from 84 of our conglomerate companies, which count on the dedication of over 125,000 employees, a collective effort, which sustains all our performance. In our daily operations, the responsible balance sheet management and the business goals achievement are fundamental. Nevertheless, They are part of a bigger picture. the benefits and the support that we bring to society reflect our work through dimension. And one number well proves it. In the first half of this year, 4.2 million people took out one of our loan or finance lines, out of those 2.2 million are women.

We area bank that combines its commercial performance with its public role of supporting the development of the country.

We released funds for people from most diverse regions, backgrounds and economic classes. For instance, loans for Brazilian Social Security retirees in -- in this line, we grew 19% over the first half of 2022. In payroll loans, there was an increase of 12% in disbursement. In addition to individuals, we also work side-by-side with the employers we allocated funds to more than 180,000 micro and small entrepreneurs in the first half of this year. Still about BRL 17 billion were released to women entrepreneurs, 20% higher than the amount granted in the first half of 2022.

Also, this semester, we launched the first export program. By June, more than 1200 companies were enrolled in this program, which aims to encourage companies to sell products in the international market. The program fosters company's first export experience through a complete journey that includes digital training, consulting and a portfolio of solutions.

In agribusiness, we released BRL 75 billion in the semester, 50% -- 15% more than the amount allocated in the same period last year. For family agriculture alone, we released BRL 7.8 billion, an increase of 18.4%. Note that we allocated funds to 106,000 family farmers directly contributing to the country's food security. We are present throughout the whole agri business product chain from family farming to large exporting conglomerates. Our great competitive advantage is knowing how to work in each one of these segments, bringing customized financial solutions to all involved in the process. In a large country as Brazil, we are the most prepared financial institution with the highest capillarity and agility to meet the sector demands.

Our footprint in 93% of Brazilian towns explains why we are the main agribusiness partner. We have the ability to quickly distribute funds to farmers in all segments and in every corner of this country. Our specialized network provides financial advice and encourages the adoption of best agricultural techniques. And that has contributed to agribusiness and family farming to thrive even more.

Proof of our commitment to the agribusiness was the launch of the largest harvest plan in our history at the end of June with the announcement of BRL 240 billion in loans and with a 26% increase in volume of funds. And today, I am pleased to announce that in the first month of the current harvest plan, we have already released BRL 21 billion, an increase of 11% over the same period of '22/'23 season. In all, more than 60,000 operations were contracted in July. Financing contracted with family farmers and medium producers represent 66% of total operations. We also work to ensure that a significant part of the Brazilian population can go back to having what we call financial citizenship.

In the second quarter of the year, we recovered more than BRL 2 billion in write-offs. In addition, Desenrola, is also a special achievement. We have helped 264,000 clients to renegotiate via Banco do Brazil and 241,000 via [indiscernible], one of the companies from our conglomerates. We have BRL 4.4 billion in renegotiated amounts in less than 4 weeks of the program. And what I like to call this Desenrola BB. We are working with an expanded vision offering, special conditions for other audiences including micro and small companies. We have always believed in the potential of this Desenrola program and we are happy to see how the market embraced this effort so that millions of resilience may have financial dignity.

Our performance in this Desenrola Program was guided by artificial intelligence or analytical intelligence and the audit selection and the clients inclination to operate with BB. In fact, in other occasions, I had already mentioned that we are encouraging digital as the improvement matrix of our organizational culture and the strategic decisions we make. We continue following that path that we are able to set well. This means having a bank with data use and analytical information available to increasingly customize relationship with customers. So once again, I stress my mantra to have a bank for each and every customer.

The hyper customization in solutions delivery, which maximizes customers' acquisition has been fruitful and generated relationship value. Some examples of our progress in this quarter are personal loan portability via open banking data, which increases the effectiveness and business brought to BB and our cloud systems and applications optimization, which allows us to scale hypercustomization in all touch points in an increasingly integrated vision in customer service.

I also would like to highlight that we have launched a whole set of deliveries that are part of our specialized investment ecosystem, providing news, analysis and financial education to clients, so that everyone can start investing even better. The investment's app new version has a revamped journey, including Multibank portfolio consolidated the data of open finance and B3 portfolio in addition to providing digital support anywhere at any time. And there's more, we launched this week in a pioneering approach the possibility for the customer to use our multibank financial manager, Minhas Finanças on WhatsApp. This is once again our digital pioneers. We are the only bank to bring financial intelligence and convenience in this channel, which is very popular among Brazilians.

And another relevant highlight this week. We announced that Banco do Brazil has already started testing real Digital, which will be the gateway to a tokenized economy confirming our commitment to always be at the forefront in new technologies adoption and innovation in the Brazilian financial market. All of that shows that this broad work of Banco do Brasil in the economy finds even more relevance when we look at all the initiatives promoted in the ESG agenda. This is a vital topic for our company and is fully in compliance with the interests of our shareholders, customers and the society.

The ESG agenda is an inherent part of every relationship we have with our strategic stakeholders. Our bank has one of the largest sustainable business portfolios in the world with a balance of BRL 321 billion, which corresponds to more than a 1/3 of BB's total classified portfolio.

As part of this strategy for an increasingly green and inclusive economy, the bank has been supporting its clients in the development of projects that generate carbon credits, mainly as avoided the forestation, which already in the first half of this year meant the protection of over 500,000 hectares of forest in the Amazon Biome. Therefore, considering these ongoing projects alone, we will generate more than 60 million in carbon credits over 30 years. But we want a lot more in sustainable solutions. We have made to wealth commitments for a more sustainable future. We will have the opportunity to clarify each one of them in the coming days, but I already want to mention 3 right now.

These are all commitments to be achieved by 2030 in alignment with global growth, such as the SDGs and also the Paris agreement. BRL 30 million in credit balance for renewable energies, BRL 200 billion in credit balance for sustainable agriculture and BRL 500 billion of balance in sustainable portfolio. We are signatories of the UN Global Compact since 2003. We gathered efforts to; promote main values in the areas of human rights, labor and environment.

Now I am pleased to announce that we have made the commitment to become ambassadors of 3 important human right movements of the Global Compact Brazil. They are: Elas Lideram 2030, Ladies lead at 2030, [indiscernible] age and race is our priority and [indiscernible] a proper wages. These are initiatives that seek to encourage companies and organizations to achieve sustainable development goals. The compliance is reflected in our commitment to valuing diversity. Also, it is a call to Brazilian companies to recognize the urgency and need to promote concrete actions.

BB wants to be recognized as a global player in sustainable practices in business and the financial system. This week, during the Amazon Summit in belem , we joined several development banks operating in the Amazon region through the green coalition in this agenda. We also have a number of relevant deliverables with regards to diversity among the publicly traded companies in the country where one of the companies that has the highest female presence in leadership for the first time in over 14 years of BB's history. We have a Board of Directors and the Board of [indiscernible] with greater gender, race and sexual orientation diversity. Half of the 8 seats of our Board of Directors are held by UN In our Board of Directors. We also have 2 Black and 2 LGBTQIA+. On the Board of officers, we are currently 45% women, a much higher number than last year's 11%.

In the Executive Board female leaders represent 21% of positions, up from 13% in 2022. These are significant progress as we continue to be in our focus. The speed of change in these 6 months of management brings to us black women, the conviction that the increased participation in decision-making levels is here to stay definitely. As in any segment of the economy, maintaining sustainable results in the financial sector is greatly influenced by the country's economic environment.

Much has been done in a short period of time and market recognition has come sooner than anticipated with rating agencies improving the country's credit ratings. And we have never stopped believing in the country and in Brazilians. As I said, when I took over, to provide credit is to believe in people.

We started the second half with a number of real signs towards structural changes in our economy. The fiscal tax, public debt dynamics matters are being addressed through reforms already submitted. Inflation is under control, and the long interest rates curve is already declining and the scenario because we are very well positioned in various lines of business in sectors that tend to perform well to this moment of the economy. So I believe that Banco do Brasil has only takes to deliver results that are sustainable and adherent to its capacity to generate business. Thank you all very much. And now I turn the floor to Geovanne, our CFO, for the financial results.

[Marco Geovanne da Silva, executive]

[Interpreted] Thank you, Tarci. Good morning, everyone. Let's then resume the presentation of our numbers, starting on Slide 10, we bring you Banco do Brazil's adjusted net income and profitability. In the first half of 2023, we delivered BRL 17.3 billion in income, a growth of 19.5% over the same period last year. This led to a return on equity that reached 21.4%, the highest level in the series in the year-to-date view. And it's very important to point at that.

In the second quarter of '23, income reached to BRL 8.8 billion, an increase of an increase 11.7% over -- in the ROE -- or rather an increase of 11.7% over the same period, equivalent to an ROE of 21.3%. Going on to Slide 11, we will talk a little bit about what helped us get to these results. We've made significant progress in our loan portfolio. In the expanded view, we've reached the mark of BRL 1.045 trillion, a growth of 13.6% in 1 year. It is worth mentioning that 31% of the portfolio is made up of sustainable businesses, completely in line with our commitment to support our clients in the transition to a greener and more inclusive economy, as Tarci mentioned. We want to advance even further by setting bold growth targets.

Now about the individuals loan portfolio, the evolution was up 10%, reaching more than BRL 302 billion in the period. We would like to highlight, in particular, the payroll loan line which is a lot less risky, grew 9.3%, reaching a balance of BRL 120 billion. I emphasize that we are competitive and efficient in the origination of payroll loans. Banco do Brasil can offer digital solutions to all of our clients who can contract most operations within seconds directly through our app. We have the best app among Brazilian banks. So in addition, we have a physical network that supports not only the origination of this type of loan, but also the complete relationship with our clients.

Looking to the company's portfolio, we would like to point the significant growth both in the micro, small and midsized companies portfolio and the large corporate portfolio. SMEs grew 21.8% and large corporate, 9.3%. We also highlight the agribusiness portfolio. Our aim is to maintain our leadership in this segment, which is very important and is part of Banco do Brasil DNA. We had an evolution -- significant evolution of 22.7%, reaching more than BRL 321 billion, driving especially by the lines of costing and agricultural investment. We understand that the partnership with the agribusiness, in addition to being in part of our DNA is also part of Banco do Brasil's mission. And we will remain competitive in this segment, bringing credit and solutions with technology and specialized knowledge to all regions of Brazil. Again, all regions of Brazil.

On Slide 12, as expected, the ALLL came in higher this quarter without a doubt reflecting the increase on credit risk. And this is explained both by a greater demand, the growth on the portfolio, but a greater demand for provisioning in some specific lines such as non-payroll lines, and there was a worsening of risk levels. As for the enforcement of the provision for the specific case that we mentioned before, it was a specific company in large corporate that filed for in-court reorganization in January of this year. So we increased the risk, and in the fourth quarter of 2022, we released the information that we had a provision of 50% for this case. And now due to the delay in the solution for this in court reorganization considering this, we expanded the provision to 70%.

It is also worth mentioning two aspects that distorts the basis of comparison in the provision expenses. The first is related to the fact that in the same period of 2022, there was still a movement of consumption of excess coverage formed due to the pandemic. That's why you see a registry for ALLL provision in the previous year, much lower than the levels we have today. And the second is specifically related to a credit line that we talked about in the previous quarter that was -- had a change in profile that was a new agreement and the loan was transformed into securities, migrating from an accounting view to securities, and it's completely provisioned for, and it ended up being transferred as impairment.

So the comparison basis for the second quarter of 2023 is lower. Unfortunately, some analysts did not realize this and talked about how the provision expenses in the second quarter compared to the first has doubled. And the truth is not that. If we were to reallocate it here, the provision expenses we had in the second quarter would have been BRL 6.7 billion, equal to an expansion of 26.8% in expenses when compared to the quarterly view. That's why this -- it's important for us to look in particular to the extended portfolio because that includes not only credits but also securities, and you see that the provision expenses have grew 22.6%.

I'd like to highlight another point we've been talking about with the market related to the recovery of write-offs. We had an addition with our networks with the purpose of increasing recovery of write-offs and we have this commitment set forth in targets for our branches, I'd like to congratulate our network. We were able to recover BRL 12.1 billion in the second quarter, an excellent performance, even above what we had originally projected in our budget.

Now on Slide 13, I will show you a little bit of NPL. We maintained solid performance on the quality of our portfolio. NPL rate over 90 days reached 2.73% and the coverage ratio was 201%, both at levels better than the average of the Brazilian financial system. In this quarter, part of the balance of the operations of that specific clients that I mentioned was worsened in terms of provision and also reached the NPL indicator above 90 days because it became considered a delay of over 90 days, and that included NPL to 2.73%. So if we didn't have that specific case, and the in-court recovery had already been enforced, we would not have suffered this impact. In the NPL index would be of around 265. Now moving on to the company's segment, it's important to mention the difference that there would be NPL of 2.58% actually have been 2.31%.

Now on Slide 14, we will look at our net interest income combining the results of our loan operations as well as securities. We've reached BRL 44 billion in the first half of this year. That was a significant growth of 36% and in the year-to-year comparison. I'd like to highlight the financial revenues from loan operations and the treasury results, which reflected both the behavior of the Selic rate and the increase in the average balance of the securities portfolio. Net interest margin has increased, ending the period at 4.9%.

Moving to Slide 15. Here, we're meeting a market demand and in line with our commitment of transparency and adding to the disclosure of the other participants in the financial industry. We will start to present the additional vision of our NII, which will bring client NII and market NII. So as you can see here, client NII is formed by the result of active and passive operations, all sensitive to spread. Active operations here include loans, private securities, et cetera. and the passive operations we considered mainly commercial funding.

Market NII is formed by the result of the asset and liability management of the bank considering not only the mismatches in terms of terms, but interest rates, exchange rates and other items. It also considers the bank's -- the Banco Patagonia NII's, which has definitely impacted it here. And it's important for those who want to understand it better to separate this to understand what our market NII would be and that will be in line with some of our peers in the private market.

Compared to the first half of 2022, the growth in client NII was driven by the growth of the average balance of operations and the increase in the [ private ] clients or NIM. The dynamics of the market NII in the same period is influenced basically by the movements of the average linkage and the volume of securities as well as the NII of Banco Patagonia.

Now on Slide 16. In the first half of '23, fee income totaled BRL 16.4 billion, up 6.8% compared to the first half of '22. Most of the lines showed a positive performance with emphasis on the increase of almost 12% in insurance pension plan and premium bonds revenues and 32% in the consortium line. It's the BB conglomerate helping generate more results for our shareholders. On the other hand, revenues from capital markets decreased by 23%, reflecting the behavior of the industry. The first half of the year was really bad for the capital market operations. Revenues from asset management remained stable, mostly due to the behavior of the volume of funds managed and the comparatively lower fees in fixed income, which in a scenario of higher interest rates gain a lot more relevance. In the same period, administrative expenses totaled BRL 17.7 billion, an increase of 7.4% compared to the first half of '22.

Note, personnel expenses which grew 8.3% completely in line with the salary increase of 8% in the bank collective agreement in September of 2022. While other administrative expenses rose by 5.9%, mainly reflecting the investments that we are making in BB's digital transformation, as Tarciana had already mentioned. With this, we reached this quarter the best cost-to-income ratio in our history of 28.3%.

Now we'll move on to Slide 17 before concluding our presentation to talk a little bit about our CET1. We remain at a solid level a result of strong organic results generation. Our CET1 reached 12.21%, a growth of 20 bps in the quarter, one of the highest among the large listed banks. And also thanks to our net income, which was integrated into that basis.

Now moving to the final slide. I'd like to talk a little bit about our guidance. Considering the performance that we presented in the first half of the year and the most up-to-date expectations of our management as well as the transparency and the commitment we have with the market, we've decided to review some intervals. In the loan portfolio, we increased the projections of the company's and agribusiness portfolios, considering the performance that we saw that is above what we estimated and therefore, we've increased the company's forecast from 8% to 12% growth and in the case of agribusiness, we expanded the range from 14% to 18%. As for individuals, we maintained our guidance, but the reflection of this loan -- of the portfolio expansion reflects and what we expect for total portfolio, which is a growth in the range of 9% to 13%.

We also decided to adjust the guidance for the growth of our net interest income due to what we're seeing, and this reflects mainly the growth of assets, but also the expansion of our fundraising structure. We saw in the first quarter, 36% of growth we're expanding the range and expecting to end the year with a growth in net interest income from 22% to 26%, higher than what we had originally informed the market.

I'd like to point 2 guidances that we are also reviewing down. The first one, of course, is fee income we had initially a guidance of 7% to 11%. And we decided to reduce this to between 4% and 8%. Of course, we've been having an increase in competitiveness and the scenarios showing higher or greater difficulties for us to be able to achieve more expressive growth, especially in asset management and other lines that we break down in the performance analysis. And that's why we understand that the commitment to deliver growth in fee income is higher than other of our peers. It's from 4% to 8%, and that is good enough.

And finally, we're also adjusting the guidance for our ALLL extended view to BRL 23 billion to BRL 27 billion. This movement is mainly justified by the worsening of credit risks in the non-payroll lines in the individuals portfolio. As for net income and expenses, we are maintaining the projections, and we believe that with this guidance, we are with a more realistic behavior in terms of what we're able to deliver, but also keeping a conservative position as the scenario is changing. We have already started discussions for our planning for 2024 vis-a-vis some changes in the economic scenario, and we expect that we will soon be able to bring a better outlook of what to expect for 2024. With that, I conclude the presentation of our results, and I would like to open our Q&A session. I thank you all for your time and attention.[Foreign Language]

[Operator]

The first question is from Daniel Vaz from Credit Suisse.

[Daniel Vaz, analyst]

[Interpreted] I would like to go into the details into the renegotiated portfolio. So I think now I can hear better. I see a movement in the renegotiated portfolio pre Desenrola and a higher contracting in the quarter. I would like to understand, out all of this 6.5 billion of contracting, I believe that we have seen higher volumes for individuals and companies. So what is the profile like in the Pre Desenrola. I would like to know if there is a specific program in the bank. And after this Desenrola, I would like to understand how Tier 1 and Tier 2 are behaving? How can we see that posted to the results from now on? Is everything going to be posted in the renegotiated portfolio? Are you going to have a breakdown? How can we better understand that so that we can model it and to be in line with your guidance. So the profile of the renegotiated loans before and now?

[Felipe Guimaraes Prince, executive]

[Interpreted] Perfect to Daniel. This is Felipe Prince. I will start answering your question first. Since the beginning of the year, when we -- this program was announced, we had already found and we also mentioned here that there was some resistance from the agents involved and turning renegotiations effective in the beginning of the year because we're expecting the beginning of the program. When the provisional manager was published, we already saw a process of people looking for this, both in our office as well as in WhatsApp. I think we are the only bank that offers the renegotiation process via WhatsApp.

This is a very effective channel for these renegotiations because it removes that embarrassment that the clients sometimes have to go to an office to say that they are in debt that they want to renegotiate a debt. So via WhatsApp, they have a totally digital journey, but we are already expecting that. This has been mentioned by our CEO, Tarciana in this call. So we already expected that this enroller would allow us a great movement in paying these loans, these debts.

So you already developed strategies, models, profiles needs of special discounts, also payment terms and payment in installments and also understanding clients that were more inclined to pay cash, then we would work with a higher discount or other clients that would be inclined to pay in longer term and then we'll have to adjust the discount. So this strategy was ready to go.

When the provisional measure was published and people really reacted well to that. There was a lot of people looking for renegotiating. So we anticipated the strategy we started early. So at the beginning -- at the end of May, beginning of June, we had all that strategy in place in the field, and we did see the results. And thanks to that, and I just want to make it clear that we are not limited to individuals as our CEO said, we have the Desenrola BB that also offers renegotiations to companies, to SMEs. So all this movement that you realize happening in this renegotiated portfolio is thanks to this movement, which happened, especially in the last week of May and throughout the whole month of June.

Yes, I know that you wanted to fine-tune your estimates, but in practice is 3.7% of our total portfolio. So our commitment here is to offer the best solution to our clients. If there is an opportunity to renegotiate, we'll talk, we'll renegotiate. But what is important is to manage this renegotiation to avoid that operations turn not renegotiated. And so we do want to provide that possibility of renegotiation.

[Operator]

Next question, Rafael Frade with Citi.

[Rafael Berger Frade, analyst]

[Interpreted] if you could, I'd like to comment a little bit about the credit quality. In this quarter specifically, I believe we had some effects, as Geovanne mentioned a few times about the higher provisions for non-payroll loans, and there was a specific case in the corporate side. But when we look at the guidance review for the year, there's still some indication of the provision expenses at around the same level for the second half of the year. So even though it seems that there are some one-off effects this quarter, the expectation is the same level in the second half of the year.

So my question is how you see the evolution of this over the year -- and another question on top of that is if you could explain what it is that worsening on non-payroll loans, the reasons behind that, if it's a new level that we should consider for the future or if it was a specific effect?

[Tarciana Gomes Medeiros, executive]

[Interpreted] Well, Rafael, thank you for your question. Let's try and clarify your doubts. So first, as Geovanne mentioned, in the provision expenses in the second quarter, we have a relevant number for the increased coverage in a specific case on the corporate line when we expanded provision due to the delay of that closing of that in court recovery plan -- and we actually have a flow of provisions that come from the individuals loan lines, nonpayroll loans. So looking to what happened, we have the performance of this nonpayroll loan, the historic numbers.

Of course, we're always fine-tuning our models, both for granting a provision the reality of the market -- to the reality of the market. I believe you can even follow this on the Central Bank's reports, even though our individuals NPL has decreased the market NPL in general is still at a growing curve. And what we did in most part was to adjust the models of expected loss related to that -- those non-payroll lines. So of course, that brings an effect into provision expenses, but what we can declare is that the new originations, in addition of being -- to being more, qualified they also maintain our faithful strategy of that adequate return adjusted to the risk and what should be taken into account as the size of the portfolio.

The portfolio today in the classified view is very close to BRL 1 trillion. So it's only natural that you have an organic generation of provision expenses, that's what we call the good cholesterol that, will be a little higher. So we understand that these expenses are normalized and they give -- makes us confident that we can continue faithful to executing our strategy and presenting it to you, both a higher quality portfolio when compared to the first quarter, we were promising that already, and that we remain with an appetite but it's a very selective appetite to expand responsibly and sustainably our loan from now on.

[Janaína Storti, executive]

Our next question is from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

My question is on your level of profitability. Congratulations, your ROE continues to be very strong. Just to think about how that should evolve from here. I think some concerns as interest rates start to come down. Your net interest income has been strong and you increased the guidance there. And thanks for disclosing the market NII to make it a little bit more comparable to your peers. But as rates come down, could that bring some pressure on your overall margin. Conversely, loan growth, you seem to be doing better than peers, maybe you're behind the peak on provisioning, it could seem. So just think about the moving parts and how you think about profitability, particularly going into next year with interest rates coming down?

[Marco Geovanne da Silva, executive]

[Interpreted] Tito, thank you for asking. I'm going to switch to Portuguese, okay? In fact, Tito, what we are doing is that we are paying attention, and we are trying to analyze which will be these impacts. The Central Bank already analyzed their expectations to reduce the interest rates. If we look at our assets and liabilities, we have a liability that is higher exposure to the post-fixed money, and in the short term, the lower interest rates will improve our NII as my funding cost is going to come down faster.

On the other hand, we will tend to have a repricing of my loan portfolio. The average period of time for this repricing is 18 months. So even going towards 2024, we believe we will be able to maintain NII stable relatively. We did run some simulations for every 100 bps of interest rate reduction, we are going to have an impact. The reduction in our NII of around BRL 89 million, BRL 90 million. So this is a very residual impact, I would say. We do have a conservative structure and at the same time, we are protected, thanks to these mismatches. But as we have a better scenario with the lower interest rates and the economy, we also should expect an improved economy, we will have expansion in businesses. We will expand credit and lower operations, ensuring our profits in the bottom line. That's why we are confident that even with this easing cycle scenario, with the reduction in the interest rates, we are not...

[Daer Labarta, analyst]

It will remain strong. So that should also kind of potential be tailwinds for next year?

[Felipe Guimaraes Prince, executive]

It will depend on how fast we renegotiate those debts that are scope. It is important to remind that especially for individuals, as we worsen the risk, we go down in the letters based on the resolution of the Central Bank, and then we have to reinforce our provisions. That's why we need to be more proactive in credit renegotiation so that we do not allow this credit to be too much overdue. But because as it becomes overdue, growingly and then it goes down and that risk scale and requires a greater provision. That's why we are being very proactive and diligent in helping clients to reprogram themselves and manage the payments. We don't want them to be late with their payments. We want them to work this out and to be paying their loans on the right days.

If I can add Tito looking at 2024, as Geovanne said, the impact and NII because of the Selic reduction is neutral, and we have a possibility of increasing our NII by increasing our portfolio. At the same time, the benign macro scenario also brings us another possibility, which is to have well-behaved provisions, I would say, growing with the portfolios, I would say. But these movements benefit our profitability, which is still strong in 2024.

[Janaína Storti, executive]

Next question from Gustavo Schroden with Bradesco.

[Gustavo Schroden, analyst]

[Interpreted] I'd like to change the focus a little bit to discuss the guidance. You reviewed it, increased NII provision, reduced fee income. And at the end of the day, there was a maintenance of the results of net income. I'd like to understand what type of dynamics we should expect in other lines that are relevant to the results, but that are not contemplated in the guidance. I'd like to understand, for example, legal expenses, what we can expect from them. Because in this quarter, it went down from historical levels of BRL 1.4 billion, BRL 1.5 billion to around BRL 900 million, I'd like to understand how this would behave over the year.

And the Previ results as well, it continued at around BRL 800 million, BRL 900 million. But if I'm not mistaken, there's been already a change in marking assets and liabilities with the new interest rates. A part of it's already been transferred to the results and how would Previ be expected to be on the second half of the year?

[Tarciana Gomes Medeiros, executive]

[Interpreted] I'll start with the legal risk. I believe you can consider that we should perform legal risks at the levels we delivered in the first quarter. In the third and fourth quarters, we would probably be very close to what happened in the first quarter. What happened this specific quarter was a movement -- process movements that we were successful in reversing. So it's important to make it very clear. It is not any tax issue. It's a civil demand and we've been fighting for quite some time, and our legal department was successful in reversing that decision. It's final ruling, and we have adapted the provision to what we effectively have to pay in the closure of this demand.

And we've also been incenting or fostering the agreement processes. It's an initiative that our management has been trying to implement regarding legal risk. We understand that a lot of the demands in Brazil end up taking too long, and we have financial losses in the maintenance of those demands. So we've been implementing models here to try and set agreements that are favorable to the bank. And that may bring an impact in provisioning as well. But looking forward, you can expect the normal levels that we had been delivering in the past quarters, in the first quarter of this year, excluding that specific point of the second quarter of '23.

About Previ, the anticipated results last quarter was BRL 884 million. And now we're guiding you towards BRL 560 million as of the third and fourth quarters. And it's important to keep in mind, basically on Previ's case, since it still has a surplus of BRL 20 billion, there was an adjustment in the discount rate. It was of 8.9% and now it's 7.16%, already reflecting this environment of reduction. The curve is closed, and this adjustment was made. But since there's that surplus, it doesn't have a significant impact on the bank, and we're applying this reduction of what's expected to BRL 500-and-something million quarterly.

In the liability or rather in the equity view, the impact is the actual impact of the health plan. There's no guarantee in assets, and the adjustment is made directly in the equity. But we're having an increase in profits that is sufficiently large to support these adjustments that reflect that post-employment benefit within the Banco do Brasil's employees' health plans.

[Janaína Storti, executive]

Our next question is from Yuri from JPMorgan.

[Yuri Fernandes, analyst]

[Interpreted] I have one question. I have a question on the regulatory area. This is something that is in the news every day. We have a possible end of the interest on equity. We have daily discussions on ceilings of interest rates in the revolving credit. So I would like to hear your opinion. I know it's not up to Banco do Brasil, but how can you have Congress and people understand that our balances here, that something needs to be balanced out. I would like to understand your point of view on that topic.

[Marco Geovanne da Silva, executive]

Yes, this is a matter that is on the mind of all the banks. And because of that, this is something that is being led by Febraban. Banco do Brasil is a member of Febraban. And the Federal administration has already proved that they are open to discussion and other discussions also, we have had this opportunity. So it's important to have the open communication between Febraban, the government, the Congress looking for the best solution so that we do not have a negative impact in the sector. We believe that a possible solution will privilege whatever is better to continue business expansions and our economy and the country.

So when we see the news and the headlines with the interest rates and also the interest on equity and -- we look for growth in a sustainable fashion. We understand that interest rates and the revolving credit for us, this is not a credit line for us, this is a help, a line for our clients when they are not able to pay their bills. The average period of time here when a client maintains that revolving credits, 18 days, 20 days, we do not have clients that are carrying over this revolving credit for a year. And we always say that whenever we have a client that is going through a hard time, we offer them a credit line, which is different. This is -- in the long term, this is cheaper, and it doesn't have such interest rates.

So for our business itself, we are already -- we already have a sustainable practice. We look for low lines with lower costs for our clients. And the business in the sector, I'm sure that this is already being discussed between the government, the Congress and Febraban, which represents all the banks. And they are, I'm sure, discussing all the issues that you raised.

[Janaína Storti, executive]

So let's move to our next question, I'll call Bernardo Guttmann from XP.

[Bernardo Guttmann, analyst]

[Interpreted] I'd like to go back to a point about the loan portfolio. Considering the challenging macro scenario with a high indebtedness level of families, I'd like to understand better the expectations for the performance of the individuals portfolio, especially clean credit, like cards and personal loans, if you can give us an idea of the percentage of approval for cards before the pandemic, at the height of the pandemic. And now. It would be interesting for us to think and understand this segment looking forward?

[Marco Geovanne da Silva, executive]

[Interpreted] Bernardo, so let's start thinking, there's clearly a focus on the payroll loans. As CEO Tarciana mentioned at the beginning, we understand that there's relevant room for us to grow in this segment, not only maintaining our leadership in public payroll loans, but to advance in the public pension plan deductible loans as well as on private pension plans. And we are working a lot on the digital originations and then I'll link this to your question. So what have we done differently from the expansion strategy that we had during the pandemic and now? We have revisited all of our onboarding tools, integrated multiple types of technologies to this process that we did not use before. And this triggers better origination with higher accuracy of the clients that joined the bank as well as a drop on our indicators of electronic fraud.

Giving some color in terms of the approval. We had an x volume of approvals during the expansioning period. In 12 months, we were able to put 1 million of clients that were taking loans and we brought them in. But now we have adjusted our metrics, and compared to that phase, we are now approving 70% less than we did in the past, always backed by this entire framework where we want to subscribe the client who is in fact wanting to do business with us, and that goes through a whole sequence, not only a fraud assessment, but also credit evaluation. And at the end of the day, we make an offer that is very suited to the profile of that client, which is one of the mantras that we've been following, which is to have a bank for each and every customer. So we come from digital origination that was exclusively dedicated to cards. And now we bring in our clients in the global view of their business.

So after describing all of that, that I mentioned, we look at their situation, and then we offer a card, checking account, personal loan or consumer credit, and that reflects in the expansion of our businesses with the clients. And that's why we believe that once the cycle becomes more favorable, you talked about the family's indebtedness level, today, for the first time, the information was disclosed that this level has dropped slightly. Combining that to a reduction on interest rates, the Desenrola program, we understand that we have a very favorable third and fourth quarters for us to implement our strategy, always based on the adequate risk and return of our deals, our business.

[Janaína Storti, executive]

Now turning to the next question, Mario Pierry from Bank of America.

[Mario Pierry, analyst]

[Interpreted] Congratulations on the results. I would like to go back to ALLL. I would like to better understand why you had to revise up your projections for ALLL, considering that the economic scenario today is a little bit better than what we had in the beginning of the year. Why was it worse? This was a surprise. You said as expected, the provisions were up, but I think the provisions are up more than expected. I would like to understand in this new guidance, you are already reflecting provisions that are specific to the company that you mentioned that you had to increase the coverage in this quarter.

In this new guidance, you are considering already 100% of provisions for this client. And in the middle of the guidance, we talk about BRL 25 billion of provision for 2023. That means that in the second half, the provisions should be lower than in the first half of the year. So I would like to better understand if that's what you're thinking, if there may be a higher provision in the third quarter, but in the fourth quarter, it starts to come down. Is that it?

[Tarciana Gomes Medeiros, executive]

Well, in a way, this is our expectation, right, Mario? As the environment improves and Desenrola results reduce the leveraging, it helps to extend families payments, and I believe we will be able to have better results on this item. I will turn the floor to Prince so that he can talk about how he sees risk from now on.

[Felipe Guimaraes Prince, executive]

[Interpreted] Mario, I will try to go into the details here. Maybe this is a question not only yours, but from other colleagues. First, I think we have to isolate expenses from provisions. So we go back to that slide when we look at the credit risk. We have to take into consideration that in the first quarter, we did have an adjustment, an operation and a specific operation was renegotiated. It was fully provisioned in credit. It was renegotiated and securities, and we also apply the full impairment to that security. So although it does seem to have higher expenses and provisions and a large amount, when you go back with that BRL 1.7 billion more or less, you realize that the expenses increase was around 25%, as Geovanne mentioned.

And now explaining a little bit more this increase to 25%. We do see, as I said, in the market is still a process of adjustment of individual loan lines that are nonpayroll loans. We have delivered what we promised that we would reach to that peak of delinquency of NPLs for individuals. You see a reduction of the NPLs in the second quarter. This is part of a strategy that was a mix that we put into practice. But in addition to that, we have in nonpayroll loan lines still a high risk. So we adjusted our models for expected losses. And remember, the expected losses models feed our pricing engine. So it is obvious that we want to grow. We are choosing, and we do have a strategy with clients that we would like to grow with. And obviously, this has to be rightly priced to the risk that we have in the market.

So this adjustment was done, and this ends up bringing in more expenses to our inventory, but also for the new nonpayroll loan originations. This is what happened, and this is reflected in the figures of the second quarter. And obviously, if the interest rates reduce and that is happening, and when that happens, we have less provision and the post fixed portfolio. We also have the Desenrola program, which should help a lot. And the general improvement in the environment for the first time, families indebtedness is coming down.

So all of these elements are still not in terms of more provision expenses for Banco do Brasil. But on the other hand, you can see our performance in recovering it. This is very favorable over the year. And it is driven first by a seasonality of the second half of the year where we have more funds in the economy and naturally, we recover more of those credits. We also have the full Desenrola program in both areas that should be happening now in the second and fourth quarters. And also our all-time history of recovery, which is usually higher in the second half of the year.

So maybe we're saying here that we are going to have a little bit more expenses in terms of provisions because of the reasons I explained. But when we look at the extended ALLL and the global credit risk, you will see a slight reduction. In some cases, also for wholesale, they are very close to being solved in the second half of the year. All of that is considered. And also going towards the end of your question, a possible worsening for that specific case for the full provisions in the second half of the year. But that will depend on the success of the in-court reorganization process and of course, the expected funding from BRL 10 billion to BRL 12 billion.

[Mario Pierry, analyst]

[Interpreted] Thank you very much, Prince. Just a quick follow-up then. What is the macro scenario? How has that changed for you from the beginning of the year to now? Which are your growth expectations for GDP, Selic rate and inflation growth? We are just starting to debate around these topics, this first drop of 0.50, and our interest rates improve the expectations, right?

[Felipe Guimaraes Prince, executive]

Yes. As Geovanne said, we had our first meeting to develop our corporate strategy, the review for the next 5 years. We were already contemplating a Selic rate reduction in August as it has happened. Our model was a little bit more conservative. The interest rates did drop a little bit more than what we expected. And all of that is being still integrated into our strategy. But if I were to tell you a guidance for 2023, where this is affecting us more, it would be in the agribusiness performance. We do see an even more favorable trend to expansion production.

The agricultural production in the second half of the year, we did have some risk aspects in place, but they did not materialize, especially in terms of price drop. And then -- and Geovanne can say it, and I don't know if it was here or when we talked to the media, but we end up being a reflex of our country's GDP. And considering that we have a strong contribution from agribusiness to the Brazilian GDP from now up to the end of the year, we are sure because we are market leaders and we understand that we have everything to cater to clients in this segment that we will be swimming in this favorable current.

And at the same time, the interest rate reduction, along with the appetite of the capital market, which also came back, and that should feed the long lines for companies starting the small and medium companies. And it's important to mention that we are again operating with Pronampe. It was suspended for 15 days. On July 1, we started operating Pronampe again and in less than 1 month, we disbursed BRL 1 billion in the line that, as you know, has the guarantee of the FGO, a fully controlled fund controlled by the government. We have Pronampe FGI, which is once again being offered in the second half of 2023. So we do have this loan hitting up for SMEs.

And the capital markets again hitting up will affected the business volume with large companies. So in our opinion, we are in a very favorable scenario. And it's important to say that maybe we have never been as well prepared to move forward in businesses and within a favorable scenario, which is already there, we believe. So I think we can expect good tailwinds for the shift, which is Banco do Brasil.

[Janaína Storti, executive]

Next question, Ricardo Buchpiguel, BTG.

[Ricardo Buchpiguel, analyst]

Congratulations on the results. I have a doubt here about capital with the change in the credit rule in July. Should we see an increase in the bank's CET1 as was indicated by private peers. Also about Desenrola, the tax credits generated in the negotiation process, will it be discounted from the bank's CET1? Or because that's the case, how was it accounted? And RWA would have a negative effect at Basel?

[Marco Geovanne da Silva, executive]

Well, Ricardo in the Desenrola case, the capital effect on the Tier 2 tends to be positive, not negative. The market similar to what was done at the time of CGPE. So we have the same effect. Now regarding BRL 229 million, the impact for us ranges from neutral to positive, considering we have less exposure in the credit card portfolio. So you can estimate between 10 to 20 bps.

[Janaína Storti, executive]

Next question is from Arnon Shirazi, Santander.

[Arnon Shirazi, analyst]

[Interpreted] My question is about 2024. I would like to know if you're already sharing anything for next year, what is your mindset? Also about Selic rate drop, how that has affected the Banco do Brasil's top line, but I would like to hear a little bit more.

[Marco Geovanne da Silva, executive]

[Interpreted] as I said, we're starting to discuss this now in the second half that we're going to effectively be able to get a better view of what 2024 will be. So in the third quarter earnings call, maybe we can bring a lot of color to you about this. But our perspective is very favorable due to this improvement in scenario, reduction of interest rates, resumption of growth, reduction of the family's level of indebtedness. So we are very optimistic looking towards the coming months as well as the year 2024.

Now as for the impact I mentioned, for every 100 bps it should be at around BRL 89 million or BRL 90 million of reduction in our margin. So for each 100 bps of reduction in Selic rate, around BRL 89 million, BRL 90 million in NII.

[Arnon Shirazi, analyst]

And that's also affected by the growth of credit portfolio, loan portfolio, right, Geovanne?

[Marco Geovanne da Silva, executive]

Yes. Definitely. We're really going to be able to work on that and have responsible growth in volume.

[Janaína Storti, executive]

So our next question is from Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

So the first one is just a follow-up to confirm. So Janaína, did you say that the impact of communication BRL 229 million from the Central Bank, the positive impact on capital is only 10 basis points to 20 basis points? Because, I mean, Itau and BTG guided for a much higher impact. Itau said about 100 basis points. BTG said about 80 basis points. You did say it's because also of lower exposure to credit cards. My understanding is that the risk weights are coming down, not just for performing credit cards, but also for SME loans, for corporate loans, even for some residential mortgage loans depending on the loan-to-value. But I want to confirm that you're saying only 10 basis points to 20 basis points positive impact in your case? And then I have a second question.

[Janaína Storti, executive]

That's right. Nicolas, the impact of that we are estimating more or less of these lines are -- this is a positive impact of 10 bps to 20 bps.

[Nicolas Riva, analyst]

And then the second question is on the perps. And I know I keep asking this early earnings call, but I'm going to ask it maybe in a different way this time. So you have both the 6.25% and the 9% next year. You have to make a decision whether you're going to call them or not. Between the two of them, it's roughly $4 billion, just below $4 billion. Would it be correct to assume that you would like to keep at least 150 basis points of AT1s, which really means that if you were to call both of them, you would be replacing at least or issuing new perps for at least $3 billion. And also in terms of strategy, if you are going to be looking for a window to issue both domestically or abroad in the next few months?

[Marco Geovanne da Silva, executive]

Yes, you're right. 150 bps, okay? And probably it would need to issue new AT1s, domestically or abroad. It will depend on the market window, okay?

[Nicolas Riva, analyst]

Okay. So one thing, we need to keep at least 150 bps or actually, you would like to have that leverage, just 150 basis points of AT1?

[Marco Geovanne da Silva, executive]

On average, 150 is okay for us.

[Janaína Storti, executive]

Our next question is from Eduardo Nishio from Genial Investimentos.

[Eduardo Nishio, analyst]

[Interpreted] My question is about the guidance. The 2 major changes were in the NII and expanded provisions. And I have questions about both. And the expanded provision, I would like to go back to prior questions. Considering our calculations, the peak would be in the second quarter, considering that you had the expected loss that you reviewed your models in the second quarter. And that specific case also affected the second quarter. Can we expect that the nominal peak for the expanded provision would be in the second quarter? And also looking at the NPL individual curves, can we expect looking at 2024 that we may have a reduction, a nominal reduction and provisions vis-a-vis 2023? This is my first question about provisions.

And my second question about NII. Looking back, when there was an increase in the Selic rate, there was a negative impact in the NII. And the simulation at year-end is pointing to another NII reduction if Selic rate comes down again. So my question is, in this period in the short term, should we expect that NII have a positive impact with the Selic drop in the next quarters.

[Tarciana Gomes Medeiros, executive]

[Interpreted] Nishio, I will start by the second question, and the first one, I'll turn to Prince. Yes. Like I said, in the short term, we do have a positive impact. So why when the impact was negative when the increase? Because my funding cost is post fixed and that increased when there was a change in the Selic rate. But now when it turns around, my cost comes down and that generates a positive impact in the margin. But you have to take into consideration that on the asset side, considering this pre, it would have to last with a duration of 18 months. And that's fine, but we do have a more competitive environment. We have raised for lower amount in loans. And we rather have a conservative approach, basically BRL 89 million in a month is stable. It's almost 0. So we are giving you this sensitivity, but again, being very conservative. And that has to do with how fast clients will want to switch that credit or to work with the portability, and then we would have a price competition there. But it's not anything serious.

And Nishio, remember that our funding expenses, our funding structure, here, we have more or less half of that attached to savings or core to deposits. So that type of funding does not have an automatic repricing. It will only reprice when Selic goes down 8.5%. So that's why the impact now in this going down curve, especially in terms of the funding, this is important, yes, but it is not affecting our whole funding base, yes. That's a good point. It's not as elastic.

Now moving to provisions, Nishio. Like I said, you can expect expenses to be normalized, the expenses that we had in the second quarter when compared to the coming quarters. And for the next year, I think you can consider that it will be proportional and it will be, yes. And in the nominal should not come down because we have a prospective to increase, to grow our portfolio, to seize this moment. As I said, we are prepared to surf this wave. So nominally, it should grow, but always attached to the portfolio growth.

[Eduardo Nishio, analyst]

[Interpreted] Excellent. So just to clarify, it grows less than the portfolio next year probably, right?

[Tarciana Gomes Medeiros, executive]

In line with the portfolio, Nishio, aligned.

[Janaína Storti, executive]

Next question, Carlos Gomez-Lopez, HSBC.

[Carlos Gomez-Lopez, analyst]

So my question goes back to the capital. On Page 17, you showed the evolution of capital in use, the impact of the actuarial assumptions and the MTM is a small impact. So I suspect that the impact of cash is actually larger and it's offset by others. So could you tell us what the impact of the actuarial assumptions would be on Cassi? And what do you expect the future impact to be as rates continue to go down? And at what point would Previ surplus start to also impact your capital ratio?

The second question is regarding the upcoming change in risk weighting for operational risk. We understand that has been delayed until 2025. We wanted to check again what your initial estimate of what the impact might?

[Tarciana Gomes Medeiros, executive]

[Interpreted] yes. Thank you, Carlos. With regard to the first question, actuarial expenses from Cassi. Definitely Cassi, we don't expect a huge change in terms of expenses, especially because it will depend, of course, on scope. It will depend on other variables because as I said, Cassi does not have assuring guaranteeing assets. So the adjustment is made in a constant basis because this liability for Banco do Brazil will always be followed for as long as we have health plans for our employees. So I don't think we release an estimate, a specific estimate for Cassi in terms of capital consumption.

I mean this quarter, it was around 18 bps of impact. But Carlos, at this time, we don't have an impact of Previ on CET1. I would mark the capital, if there was a deficit situation, and we don't have this perspective. But we work with Capital Bank so that if necessary, we can absorb any impact -- any potential impact of actuarial. And looking specifically at Previ, as we have a more benign scenario also favors the formation of surplus results at Previ. But in terms of the reduction of the discount rate, it was -- probably all of it was absorbed. So there will not be such a significant impact.

And about your question about the operating risk. In our estimates, I believe we released this information in the last call. It was between 100 and 150 bps of reduction with the implementation of the operating risk aspects that as far as we're concerned is as of January of '25. It's nothing official, but according to the contacts with our peers and the Central Bank, this will probably be left for January '25 with the possibility of this implementation being a phased process.

[Carlos Gomez-Lopez, analyst]

[Interpreted] And the -- it would be a delayed impact to increase dividends?

[Tarciana Gomes Medeiros, executive]

[Interpreted] no. No, we'll maintain dividends at this level. We'll take it easy. We have until 2025, see how the tax reform develops. We also have regulatory issues, I mean. We believe that today, we have one of the best payout ratios in the system. So we consider that 40% is adequate, and it has been allowing us to maintain the growth of our base in a sustainable way, maintaining this muscle so that we can also support growth. We can't lose track that in a more benign scenario. The growth of the economy will open opportunities for us to grow our assets even further. And for that, we need to have a solid capital base as CET1.

[Janaína Storti, executive]

So to conclude, we will turn to our last question, Renato Meloni, from Autonomous.

[Renato Meloni, analyst]

[Interpreted] I would like to go back to NII in the market. I would like to know if this is sensitive to the interest rates specific for the market NII? I understand that you're talking about the consolidated NII.

Second, when you look at the end of 2024, '25, if we go into a more stabilized interest rate period, what do you expect it to be a recurring result for this line?

[Tarciana Gomes Medeiros, executive]

[Interpreted] Well, we do not have that -- we are not disclosing that information. We are always bringing information to you under a consolidated point of view. This is the first time we are bringing in this new metric even -- to be comparable to our peers. We were already testing these figures. That's why we started with our historic series. But looking at the market NII, the ideal situation here would -- for it to be in that because then everything -- we have everything for the client's NII, but the drop in the interest rate does help right now our market NII.

[Janaína Storti, executive]

[Interpreted] So we now end our Q&A session. I would like to thank you very much for participating in this call, and I would like to turn the floor back to Tarciana for her final remarks.

[Tarciana Gomes Medeiros, executive]

[Interpreted] I would like to thank you all for being here with us in this conference call. Thank you very much for your questions. Thank you for the true interest in our business, and I would like to tell you that you may remain confident. And as Prince also repeated, we are trustful about our results. We are confident about the sustainability of this company in the next quarter and in the next quarters that we will have in the future. Thank you all very much, and see you in the next teleconference. Bye-bye.