Banco do Brasil SA

BOVESPA:BBAS3

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Banco do Brasil Third Quarter 2018 Earnings Conference Call. This event is being recorded. [Operator Instructions] This conference call is also being broadcast live via webcast and through Banco do Brasil website at www.bb.com.br/ir, where the presentation is also available. The replay of the conference call will be available through the phone number [phone] until November 16, in English and Portuguese. To access the replay, please ask the operator to listen to BB's conference call. Identification will be required. Participants may view the slides in any order they wish.

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

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

[Marcelo Labuto, executive]

Good morning, everyone. Thank you for listening to our earnings release conference call. Banco do Brasil posted an adjusted net income of BRL 3.4 billion in the quarter, 25.6% higher than the same period last year. These results reflect the guidelines that have [ relived ] our work over the past 2 years and with that, we'll keep our guidance, our plans for the upcoming quarters, which are: increasing profitability, asset quality improvement, efficiency in capital allocation, admin extensive under strict control, better customer experience, higher investments in digital transformation and our workforce. We started our journey flowing 6.6% ROE in 2016, and we more than doubled this figure by reaching 14.3%. We reinforced our commitments to bring the returns closer to those ones even by our main peers. This is not the level we want but below. We are on the right path to achieve this.

I highlight here our strategy of changing the mix of the credit portfolio. We need a bigger segment that will remain at least on the payroll zones, and we will broaden our focus on other lines, such as consumer finance and salary loans.

As an example, consumer financing creates by BRL 1 billion in the quarter, growing 19.8% compared to June. Regarding very small and small companies, we are originating more working capital transactions with receivables and shorter maturities. For the large companies, our strategy will remain on offering Capital Market solutions.

Profitability will also increase by diversification in our business. In this strategy, fee income, which grow 5.3% in the first 9 months of the year, is more important. We will also change the mix of our results formation. The way to do it will be the expansion of the active customers in our base and in more aggressive behavior in attracting new clients. The quarterly results also reflect the improvement in our credit quality. After 6 quarters, we present a delinquency rate below the financial industry and lower than our main peers as we did in the past.

Other indicators also shown improvement in credit quality. Provisioning expenses are 31.7% lower than the first 9 months of the last year, and the coverage ratio has, once again, exceeded 19 -- 193% of the delinquency. 2018 was a year in which we focused on the recovered -- recovery of our loan book. For 2019, our claim pointed out to a more aggressive business at suit, we have not yet released our guidance, but I can tell you that next year we will present a strong credit growth in line with our main peers. The reduction of the risk premium after the elections and the expectation for the structural reforms are positive effects that will contribute to more consistent growth of the economy and to the credit market acceleration.

We are prepared for the growth in credit. The efficiency management of our assets allows us to reaffirm the target of reaching 11% CET1 in 2022. This projection already considers the full impact of implementation of the Basel III rules; the credit growth projections for the coming years and the adequate return to our shareholders. We also forecast that we will be able to reach the right end of the range for the payout ratio. The control of admin expenses also remains one of our main pillars.

In the first 9 months of the year, we kept our costs under control with a growth of only 0.8%, which is well below the inflation for the periods. This is an assumption that remains for the next quarters as well as maintains the cost to income ratio at the current level. Another target is the improvement in customer experience and the significant investment in digital. These are 2 topics that are highly related and perhaps the most challenging at the moment. This points to the net release to adapt it to fast change that the financial statement states, and that impact the way clients relate to bank. We will be continuing to focus on the specialization of our service network. In this quarter, we reached 622 digital and specialized branch. We already have almost 2.5 million customers who started to do the relationship with us totally digital.

Our digital relationships for the Estilo and Exclusivo segments serve about 4 million customers. Regarding to mobile users, we exceeded 16 million users in our app. Mobile, today alone, is the channel responsible for almost 60% of the transactions carried out by our customers. These significant numbers show the size of our operations and reinforce the conviction of our way forward.

Banco do Brasil is already the largest digital bank in the country and we always innovate.

In the third quarter, we are the first to offer financial transactions directly through WhatsApp, using II -- AI, which creates more convenience for our customers. We also expanded our open bank projects by announcing the partnership with ["They Should Move"], a fintech that works with payroll loans. This month, we started offering other lines of credit through this platform as well. For us, fintechs are partners in the joint development of solutions where the winners are our clients. Another new solution is the digital credit portability.

Now our customers can simulate and transfer the loans for other banks to Banco do Brasil directly through the mobile, without going to a branch, making the process simpler and faster. Investments also remain our focus. In the coming days, we will reach BRL 2 billion in funds raised through our Investment Simulator, which has launched in December last year. The customer experience will be increasing in sizes in the banking market. More agile, simpler and subtle banker will also be a more efficient and profitable one.

Finally, I would like to thank the Banco do Brasil's employees for the commitment, competence and dedication. One of our main pillars are the investments we made in trainings, performance compensation and in career development. Our employees are the greatest strength and our assets that will lead Banco do Brasil to revamp itself every day, increasing our relevance to our customers and bringing the expected returns for our shareholders. Thank you all, and now Daniel Maria will bring you some additional details with his presentation.

[Daniel Maria, executive]

Labuto, thanks for the presentation. Good morning, everyone. Moving to Page 4, we bring some highlights of the third quarter results that Marcelo Labuto just commented.

On Slide 5, we bring some market ratios and the average estimates by analysts for 2018 and '19 to those metrics. Adjusted earnings per share reached BRL 1.22 in the third quarter of '18. The dividend yield was 4.98%. The price/earnings ratio reached 6.74%, and the price/book value ratio was 0.79% in the third quarter of 2018.

On the next Page, we bring the building blocks for the net income for the third quarter of '18 and for the 9 months of '18. The adjusted net income for the 9 months of '18 was BRL 9.67 billion that represented a return on equity of 13.4%. This adjusted net income was dropped from an NII of BRL 37.14 billion in the same period. The cost to the credit provisions was BRL 11 billion. The fee income was BRL 20.2 billion in the period that covered 85.2% of the administrative expenses.

By the way, the ratio of fee income/admin expenses is the highest level since 2014.

On Slide 7, we show the earnings breakdown. The third quarter of '18, NII came flattish to the second quarter of 2018. The funding expenses grew due to the increase in the average balance of the commercial funding compensated by the treasury results. The fee income grew 5.3% in the 9 months of '18 in comparison to the same period last year, which highlights the checking account fees that increased at 6.4%(sic) [6.1%] and the asset management fees that rose 12%.

On Slide 8, we have an expanded view of the loan portfolio and the credit quality. In September '18, the loan portfolio reached BRL 686.3 billion, an increase of 0.1% over the previous quarter. The NPL ratio over 90 days has decreased at 51 basis points quarter-on-quarter, reaching 2.83%. The new NPL was 0.27%, lower than the past quarters. We explained it by the company's portfolio as we're going to discuss ahead.

The coverage ratio increased to 192.72% and the cost of risk fell to 3.35%, the fourth quarter reduction in a row.

On Slide 9, we show the individuals portfolio. Loans portfolio grew 2% compared to the second quarter of '18, reaching BRL 184.6 billion. We highlight the increasing lines such as personal loans that grows 19.8% quarter-on-quarter, confirming the strategy of diversification of total loans, all of them pay loans -- payroll, besides we keep our leadership in payroll loans in Brazil. The NPL ratio above 90 days decreased at 6 basis points, reaching 3.27%. The NPL formation over the loan portfolio reached 0.79%, lower than the past quarters. The coverage ratio increased and reaching 181.14%. The credit provision expenses were BRL 1.8 billion in the period for [ ratio ] portfolio.

On Slide 10, we present the loans to companies that reached BRL 263.9 billion in September '18. We highlight that the very small and small companies portfolio is close to inflection point, as Mr. Labuto highlighted. The write-off for lease portfolio is approaching the normal levels and disbursements are growing. For instance, in the third quarter of '18 disbursements in the very small and small companies portfolio grew 19.8% in comparison to the third quarter '17. The NPL over 90 days reached 3.77%. This ratio does not carry anymore that specific case in the [indiscernible] during the third quarter of '18. The new NPL ratio to the loan portfolio was minus 0.35%. The regularization of these specific cases was a contributing factor to the ratio. Adjusting the ratio, discounting those cases, the new NPL over the loan portfolio ratio would have been 0.87%. The coverage ratio was 197.7%. The credit provision expenses reached BRL 1.3 billion.

On Slide 11. We have the Agribusiness portfolio that reached BRL 188.2 billion in third quarter of '18, mainly impacted by the reduction in the agroindustrial segment. The NPL plus 90 days was stable at 1.62%, and the NPL formation reached 0.45%. The coverage ratio increased to 194.52% and the credit provisions expenses were BRL 1.1 billion.

On Page 12, we bring the net interest margin. NIM decreased 4 basis points quarter-on-quarter, reaching 3.94%. This is explained by the high-level of liquid assets in relation to the total assets in the third quarter of '18 compared to the second quarter of '18. The risk-adjusted NIM increased from 2.84% in the third quarter to 2.92% in the third quarter of '18.

On the next slide, we bring the spread by portfolio. The credit spreads increased to 19 basis points, reaching 7.61%, mainly due to the increase in spreads in the company's portfolio. That increased by 34 basis points over the previous year -- previous quarter. The spread from individuals and Agribusiness portfolio was stable.

On Slide 14, we have the BIS ratio. In September 2018, we reached 9.66% of CET1. We reinforce our targets to reach the minimum amount of CET1 of 11% in the January 22.

On Slide 15, we're bringing the changes in the CET1 comparing September '18 to the previous quarter. We note that the acquisition of the additional stakes of Banco Patagonia, as we had previously notice the markets, consumed 12 basis points of CET1. We closed the quarter with 9.66% of CET1.

In ending the presentation, we bring the guidance. We highlight the new guidance of NII, minus 6.5% to minus 5%. We delivered minus 6.9% in the accumulated 9 months of 2018, and we forecast the NII is our new guidance by the end of the year. Administrative expenses stayed below the guidance, increasing 0.8%, slightly below the low range of the guidance. All the other lines are redeemed guidance. Saying that, we conclude today's presentation and we move forward to Q&A session.

[Operator]

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

[Carlos Macedo, analyst]

I have one question. I think, Labuto, in the beginning, you mentioned that -- congrats on taking the CEO position, first. But second, putting you on the grill already, you've mentioned that you expect loan growth to approximate the levels of your private sector peers next year, which, if you listen to them, it probably will be somewhere in double digits on the low double-digit side. What lines of credit do you expect to grow to reach there? I mean, there has been a lot of growth in the consumer side, recovery in SMEs, the corporate side has been in line a little bit. What lines do you expect will drive that? And how do you hope to achieve that growth? Is it with -- are you going to increase your risk appetite? Or is it just a matter of demand coming through the Banco do Brasil branches that you expect will increase as the economy ramps up?

[Bernardo Rothe, executive]

Macedo, Bernardo speaking, thank you for your question. We expect that the changing mix is going to keep improving the results of the bank through the next quarters. So we are going to keep our focus on personal loans, consumer loans. Growing these non-payroll type of loans is in the total mix. Although payroll loans and mortgages, they want to keep a high participation, now is total portfolio from the individuals. But our growing participation from non-payroll loans is in the total mix. That's going to help with profitability. And also the SMEs, it's not growing that much this year because of the base effect, looking at how our portfolio looked like 3 years ago and how it's performing since the recession. So we are still going through the clean-up process, right, and we are focused on growing the working capital type of lines of credit in SMEs. And in fact, that's now the case with very small and small companies, right, because it's up to BRL 25 million different from our peers. So we expect that type of business, working capital with very small and small companies to grow at a good pace next year, that's going to help a lot with the profitability of the overall credit portfolio. It's one of the most profitable type of business in normal times. And that's not only through credit that we're going to get there. As Labuto mentioned, we want to diversify the sources of new business to deal with all the clients that already exist in our portfolio and new clients as well. So we want to grow through fees as well. And that's the way of growing without consuming capital, so to help improve profitability and that's the target. And that's basically the strategy that we have been deploying for the last 2, 3 years.

So we are going to keep doing that. We've been showing improvements in the profitability. If you look at the return on equity -- in the shareholder's view, where we take out the hybrid from the capital, the 81.1 -- BRL 8.1 billion from the capital, we reached this quarter already BRL 15.7 billion. So the difference is narrowing and -- but we still have not a long way, but a way to go to reach the same profitability as our peers by diversification, changing the credit portfolio. The diversification fulfills new clients, not only the existing clients but also improving the profitability that for the existing clients that we have in using our products and services.

[Carlos Macedo, analyst]

Just a one follow-up then. So you would say that it would be more of a commercial effort to increase loans than something that where you would have bigger risk appetite, slightly more relaxed risk perception and like longer duration -- longer terms, higher approval rates and things like that?

[Bernardo Rothe, executive]

I would say it's a commercial effort but also, when you grow the mix, non-payroll loans in these very small and small companies, there is a change in the risk profile of the portfolio. So there is more risk because this type of loans that carries a higher risk. But if you consider the risk return is very good. So means that we are going to make more money, but we are going to bring more risks, but it's a risk that we can take. The increase in profitability, increasing margins that we make through these types of loans, is more than cover the increasing risk. So it's a commercial effort, but there is a change in the mix that carries higher risk.

But looking at the quality of our client base, right, where even in higher risk type of products, our delinquency ratio is pretty low. Just to give you a number, right, it's 2.6% for credit cards, one of the most higher risk type products in the market, and delinquency ratio for credit card in Brazil is only 3.6%. Meaning that we can grow this type of lines of credit that have a higher risk and keep delinquency ratios under control and improving the margins and spreads and so on.

[Operator]

Our next question comes from Domingos Falavina from JP Morgan.

[Domingos Falavina, analyst]

Labuto, congratulations on the new CEO role. My question is more on strategy and, sort of, how should we think about this term as you as the CEO also. Specifically here, my question is -- and if possible, please like rank in terms like the top 2 priorities. When we look at income statement of the bank, how would you want to be remembered as a CEO of the bank? On loan growth, would it be efficiency gains? Would it be insurance product growth? Would it be the asset quality improvement? And just to put into context, like, to some of us here at least when we look at, like, the period that Bendine run the bank. The bank had nowhere shrinkage, however, very rapid growth in terms of loans, capital being burnt. Look at Caffarelli, more recently branch optimization, are we going up, is capital being built? Each president has had a slightly different rate, so my question is, when we look at the products, which ones are the priority? Or how do you want to be remembered as the CEO of the bank?

[Bernardo Rothe, executive]

Domingos, Bernardo speaking, okay, I will take the question. But I can tell you that this strategy, it's not going to change that much. We are deploying. We decide -- we review our strategy in the beginning of the second quarter of every year. So the strategy was pretty much in place when we had the change. So we are not going to have a big change in strategy or direction for the next year.

And everyone here, including myself, Labuto and Caffarelli at the time and all the other Executive Vice Presidents, we are part of this process. So everyone steps in and gives their ideas and how we should move forward. So there's no change in direction.

The idea is to keep growing efficiency. So we are going to keep addressing costs in the way we can to keep the administrative expenses growing at least in line with or if not lower than the inflation. We are going to keep growing fees over inflation. Cost of rates is going to keep reducing. In the next quarters, we have room to do that, so we still have room to improve and we should even go below 3% of cost of risk in the near future, before we could come back to over 3% as the mix starts to have more of these small and very small companies and the non-payroll loans in the total mix. And next year also we should grow the NII. With the changing mix, we should see the NII growing next year, so helping with the top line, to grow top line and improve the earnings per share. So we have, of course, changes in the style of executing the strategy, right? So I can tell you everyone has his or her own style, but the strategy itself is pretty much the same.

[Operator]

Next question comes from Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, analyst]

Can you give us an update on the payments for economic plans, and whether you are going to make any disclosure about them?

[Bernardo Rothe, executive]

Carlos, thank you for your question. In terms of economic plans, we -- since we didn't see the Supreme Court review, we have seen an increase in executions and as the plan was being prepared. So we have seen an increase in expenses with economic plans indeed this year since the second quarter. But it's something that should over time reduce, and we have provisions in place that covers most of our -- all of our exposures, so we think that it's something that in the next quarters, maybe not in the beginning of next year, but by the end of next year -- to the end of next of year, should reduce by a good pace.

[Carlos Gomez-Lopez, analyst]

So I want to understand, you have new claims. That's what I understand from your answer.

[Bernardo Rothe, executive]

No, new claims, sorry. Not in claims. The executions of old claims that we've obtained, right? So the payment has been claimed along with that.

[Carlos Gomez-Lopez, analyst]

The payment were imbursed. And you had to create any provision for it?

[Bernardo Rothe, executive]

No, in fact, what we are doing and saying, right, there is a time difference between the payment and the release of provisions. So it should take a while, because we paid first, before the due process is considered ended by a quarter, and only after that, we release provision. So there is a lag between the payment itself and the release of provisions.

[Carlos Gomez-Lopez, analyst]

And you think there will be a net release of provisions at the end of the process, or not material?

[Bernardo Rothe, executive]

It depends how they review this process of the -- people that can enter into these -- they can apply to be part of this agreement that was approved by the Supreme Court. So only after the whole process that's going to take 2 years, we may have some provisions to release. So for now, we are releasing provisions made by the cases that we have faced. That's it, okay? So as a payment occurred way before the end of the process itself, there is a lag between the 2, the release of each of these provisions takes a while.

[Operator]

Next question comes from Alain Nicolau from Bradesco.

[Alain Nicolau, analyst]

I think just one topic is missing. You have your really strong type collection recovering this quarter and you generally have this seasonality in terms of recovery, where your second and fourth quarter are stronger.

So my question is, is anything nonrecurring in this line? And what should we expect for the fourth quarter? Another strong quarter or you have some normalization in this level?

[Bernardo Rothe, executive]

Alain, thank you for your question. The collection in the third quarter was -- came at a very good pace, and we expect that the fourth quarter is going to be a good one as well, I would say, in line with what we have in the third quarter. But it tends to decrease next year. Why? Because the new losses are not happening at the same pace as in the past. So the size of this total portfolio of collectible losses are reducing, right? So for next year that should be lower than what we are doing this year. But for the next quarter, it should be, at least, at the same level.

[Operator]

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

[Daniel Maria, executive]

Thank you all for the attendance and for the questions, and we remind that the Investor Relations team is available for further questions. Have a nice day, and good weekend. Thank you.

[Operator]

That does conclude Banco do Brasil conference call for today. As a reminder, the material used in this conference call is available on Banco do Brasil Investor Relations website.

Thank you very much for your participation, and have a nice day. You may now disconnect.