Banco do Brasil SA

BOVESPA:BBAS3

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to Banco do Brasil Third Quarter 2019 Earnings Conference Call. This event is being recorded. [Operator Instructions]

This conference call is also being broadcasted live via webcast through Banco do Brasil website at www.bb.com.br/ir, where the presentation is also available. A replay of the conference call will be available through the phone number [phone] until November 14, 2019, in English and Portuguese.

[Operator Instructions]

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 systems. Banco do Brasil is not responsible for updating any estimate in this presentation.

The call will be hosted by Mr. Daniel Maria, Head of Investor Relations. Mr. Daniel Maria, you might -- you may now begin.

[Daniel Maria, executive]

Okay. Thank you. First of all, thank you all for attending our conference. Let's start on Page 4 with some earnings highlights. We delivered an adjusted net income of BRL 13.2 billion in the first 9 months of 2019. This represents an increase of a growth of 36.8% in relation to the same period last year. The fee income in those 9 months represented BRL 21.7 billion. That is a growth of 7.3%. In terms of administrative expenses, the cost has increased below inflation, growing 0.7%. That represented, in a nominal terms, 22.9% -- BRL 22.9 billion.

Cost-to-income ratio, we delivered again the best index in our series, reaching 35.7%, an improvement of 204 basis points in relation to the same period last year. And in terms of profitability, return on equity we reached in this quarter 17.5%, an increase of 429 basis point in relation to September of last year.

Now moving to the next page, Page 5. We bring just our profitability and showing that we have been increasing quarter-on-quarter our results consistently. And this quarter, specifically, we brought BRL 4.5 billion in terms of net income -- adjusted net income, and this represented a growth of 33.5% in relation to the same quarter last year and 2.5% in relation to the last quarter.

The same thing can be seen in the behavior of the return on equity that is shown here on the right-hand side of our slide. Moving to the next page, Page 6. We bring you the NII, that grew 1.5% in this quarter and 4.9% in the last 12 months. This growth, we have some trends. First of all, we see movements in terms of changing the mix of the portfolio.

For instance, the income coming from the individuals portfolio is growing the participation. We have also a reduction in the cost of funding, and mainly this is related to the judicial deposits that we are in the process of reviewing some contracts. And you can see reduction in the cost itself of those lines. And certainly, treasury contributed positively this quarter to the results. I would say that the trend is that for the next quarter, probably the treasury will not bring the same sort of contribution due to the environment that we see. But we expect to continue growing in terms of NII.

The next page, we bring NIM -- the behavior of NIM. NIM reached 3.95%, that is an increase of 6 basis points. The NIM certainly reflects 2 events. One event is the change in mix; and secondly, the relationship of the loan portfolio to the total portfolio. The -- on the right-hand side, we bring here the spread for credit operations. That is pretty stable quarter-on-quarter and increasing when we compare to the same period last year.

The spread for individuals was 16.34%, for companies 4.93, slightly below, and we can explain this behavior for the companies portfolio, mainly because part of the portfolio, mainly those companies that are in Chapter 11 related to the same group that is not accruing interest on this. And this can explain part of that movement. And agribusiness, 4.59%.

On the next page, Page 8, we bring the fee income. Fee income reached BRL 21.7 billion in these 9 months -- in the 9 months of 2019. This is a growth of 7.3% compared to the same period 2018. For the fee income, there is an effort of the bank to diversify the fee -- the sources of fee income. And certainly, we are increasing -- we are working to increase the penetration in our customer base, including the non-account holders and also using analytics to understand better the customer behavior, and certainly, in a way that we can leverage the potential of the fee business for the bank. On the next slide, Slide 9, we bring the admin expenses and some ratios -- some efficiency ratios.

As I said, costs grew 0.7% below inflation. And this reflected a better cost-to-income, 35.7%, it was what we reached. And in another perspective, the coverage ratio, considering the fee business, how much coverage the administrative cost has reached, 93.8%. And within 2 metrics that are important, the number of employees that we ended the quarter with 93,872 of employees. And this is after concluding the severance process that we started at the end or at the beginning of the quarter.

Yes, and also a reduction in the number of branches. And there is a few movements here. Converting branches into points of services and also shut down some of the branches. Moving to the next page, we bring the loan portfolio. The loan portfolio in an expanded view. It was almost stable compared to the last quarter, yes?

On the right-hand side of the slide, we bring the dynamic of this portfolio and then showing that the retail business is growing much faster compared to the other parts of the business. Yes, individuals and SMEs, as you can see there. Wholesale and agroindustrial is the same movement, basically can be explained by the different dynamics in capital markets. That is bringing a higher business remediation process and Banco do Brasil BB Investimentos is having a relevant position in bringing those companies to capital markets. And on the bottom part of the slide, we bring another perspective, just showing how much of the retail operations represents in our total portfolio compared to the same period of September last year, moved from 36% to 39.6%.

On the next slide, we bring Slide 11, we bring the individuals loan portfolio. The portfolio increased 10.2% in the last 12 months. And I'd like to highlight here the growth in the non-payroll loan that increased -- that moved actually from 27.5% of the participation in the individuals loan portfolio to 29.1%. Then this is in line with our strategy to gain more relevance to those lines that offer a better margins. And just some of the products that are driving this performance, for instance, the consumer finance that grew 73% September '18 against -- September '19 versus September '18. In credit cards, that increased 14% in the same period.

Now moving to the next slide, Slide 12. We bring the loans to companies, and in an expanded view, we see that the portfolio decreased and it's 5.4% in the last 12 months and 1.3% in the last quarter. This reduction is exactly that movement that I observed previously about the large corporate segments and this process of migrating to capital markets, and Banco do Brasil participate in this process.

On the right-hand side, we bring the SME portfolio of companies with revenues up to BRL 200 million. You see that the inflection point for this portfolio happened. We bring a growth and mainly some lines of credits driving this growth, for instance, working capital, that grew 40.3% and revolving credits growing 35.1%.

The next Slide 13, we bring the agribusiness portfolio. The -- there are 2 movements. First of all, let's start with the yellow part of the portfolio is the agroindustrial. Agroindustrial is reducing, is the same strategy or the same approach as the large corporates and Banco do Brasil is having a protagonism in this process of disintermediating those companies and certainly offering CRAs or CDCAs or other capital markets instruments for this.

On the other -- and looking or observing the blue part of those bars that is basically what we call rural loans. We observed a growth of 0.8% September '19 against September '18. There is another interesting movements that I would like to point out here that the individuals gain more relevance in this portfolio growing 4.5%, and this helps in terms of profitability as well.

And the bank has a market share of 65.1% in terms of rural loans.

Now moving to Slide 14. We bring the ALL expenses. The credit provisions was BRL 3.3 billion in this quarter. We had some reinforcement in this quarter relatively to the specific case. In terms of cost of risk, we reached 3.14%. But if we exclude this large restructuring case or this large Chapter 11 case, I would say that the portfolio is below the 3%.

Moving to the next slide. We bring the credit quality, Slide 15. NPLs over 90 days ended the quarter at 3.47%. If we take out the specific case, our NPLs over 90 days would be 2.74% and the same rationale for coverage ratio. The coverage ratio, excluding the case is 213%. Moving to the next slide. We bring -- we drilled down this -- the NPL by segment, then we have the following movements. Individuals growing a little bit, and this growth can be explained by a growth in the restructuring portfolio. Usually, we see a seasonality in this portfolio that tends to be more pressured in the third quarter. That tends to be better in the fourth quarter.

And also, some of the movements are in the change of the mix. The companies portfolio that the individual NPL is 3.09 if we exclude the specific case and shows a downward trend. It's exactly because we are generating -- we are underwriting better credit quality in new vintages. And also agribusiness. Agribusiness, that's reached 1.7%, excluding the case. In the case of agribusiness, there are 2 perspectives. The growth in the third quarter comparing to the second quarter can be associated to some of the cultures that are more pressured in terms of price and -- but this is manageable.

And when you compare on an annual basis from September '18 to September '19, certainly, this change in terms of the agribusiness reducing the total portfolio has a contribution in this growth that naturally can explain this trend.

Now moving to the next slide. We show the new NPL. This is Slide 17. We show the total NPL, also excluding the specific case and separating by segment.

Now moving to the next slide. We bring the capital base of the bank. We reached 10.24% of CET1 this quarter. And on the bottom part, we bring just the dynamic of this. We contributed in terms of retained earnings with 0.53 basis points -- 53 basis points. And we had also one relevant aspect that reduced capital that was in investments.

With the BB Seguridade selling the participation of IRB increases the participation -- increases investments in the company, and there is a rule that is used to allocate capital. And depending on that there is a threshold for that rule that is extensive.

And actually, we had a situation that was above that, that required additional capital needs. However, when BB Seguridade pays the payouts, this spend should be reverted, then we expect -- we understand that this is an intermediary situation.

And finally, going to the next slide, Slide 18 -- sorry, 19, we bring our guidance. By the way, we interrupted our guidance during the follow on, and we just reestablished the guidance yesterday with a material fact, and we did some adjustments in the guidance.

Adjusted net income, the new -- the revised guidance is from 16.5% to 18.5%. And also in the case of rural loans that we brought a new level of 0.5% to 3% growth. In terms of the performance, we delivered BRL 13.2 billion in the adjusted net income, in line with the guidance. When you annualize, the NII 4.6%, in line with the guidance. Loan portfolio was minus 0.1, also in line. Individuals portfolio, we are growing close to the upper part of the guidance, with a 10.4%. Companies portfolio, minus 8.6%, below the guidance. However, we expect -- actually, we expect to converge to the guidance in the fourth quarter since we have some repayments that are being expected.

In rural loans comparing to the new guidance, we are at 0.8%. Provisions, minus 10, and we expect to be inside the guidance. Fee income, 7.3%, in line -- in the top part of the guidance. In administrative expenses, 0.7%, below the guidance, however, we expect to converge to the guidance in case some events happened in the fourth quarter. I thank you, and let's move to the Q&A session.

[Operator]

[Operator Instructions]

Our first question comes from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A couple of questions. First, in terms of your loan growth, it continued to be below the peers. I understand you're still -- you're not really growing in large corporates, agribusiness is also not growing. But even consumer lending was a bit below the peers, that make 2% quarter-over-quarter. So just thinking, going into next year, the economy improves, capital is increasing for you guys, how should we think about loan growth for next year?

And then I guess, second question, with the recent cost savings that you announced, do you think there could be more cost savings into next year, and can efficiency improve further? And I guess, along those lines, ROE is already at 18%, like can ROE expand further?

[Daniel Maria, executive]

Thanks, Tito for the question. Let's start with the loan growth. Actually, it's hard to compare with the peers because they have different movements. For instance, in our individuals portfolio, the auto finance, for instance, that most of the banks, they have full insight. Our main channel for auto finance is through Banco Votorantim, and this is not integrated in our portfolio. And also -- but I would say that we are growing exactly the way we want to grow, and this can be proven looking at the guidance and remain flirting with the top part of the guidance.

We have space for changing the mix in this portfolio and to monetize better this customer base. For next year, how we can think about the dynamic of this portfolio. Certainly, we are working with the budgets that's just explaining the trends. First of all, this large corporate portfolio. We see a space to reduce a little bit, as I showed comparing our performance due to the guidance by the end of the year. I would say that for next year, you could have some reduction, yes, but it's close to the inflection point. Then we expect seeing that with a more benign economic scenario to have a better growth in terms of the total portfolio, yes, and the action in the SME portfolio, individuals portfolio and stabilizing the large corporate portfolio. And going to the cost savings, certainly each step ahead is more difficult when we did such movements. But there is always something to do, yes, and we will work on this. I would say that most of the redundancy that we have in our network, we address. And we are evaluating this consistently. And if it's necessary to continue converting branches or whatever, we are going to do, because we are observing that. And you need to look at this exactly comparing to the customer behavior. Nowadays, we have 82% of our transactions done through digital channels. Just as a reference, 3 years ago, was 62%. Then people -- we are putting available more options and people is getting used to use it. And certainly, this affects the inflow in the branches. There is also another metric that we use to measure this, that is the maturity of our customer base. What we call digital maturity in the proprietary model that we have, and we try to categorize and understand the customer behavior. We have 53% of our customers that we consider digital mature. They use often the apps or the Internet or whatever the digital channels. On the other hand, we have 47% of the people that -- they are in different levels of digital maturity. And what is the work the bank is doing is educating and showing the benefits, and we expect to migrate more people to this digital profile.

We will never be 100% digital because this is not our value proposition. We want to have to mix this but certainly, this changes the way you service people, and you can have -- in smaller branches, and you can have more optimal network. And related to the return on equities, I would say that we see space for continued growing, yes? Certainly, in terms of efficiency, as you said, in terms of the fee business, although all institutions, they have their challenges, we see space for monetizing that and this customer base and the usage of analytics, it's one important aspect. We have a lot of data insight, and we are using this data. We have been using this data to understand the customer behavior and to address options that fits better with the customer needs, yes?

And certainly, having specialized service that you have people close to the customers. And there is also one factor that we expect, specifically for next year, is to reduce the legal risk. This year, we did a work to anticipate part of those cases trying to find, how can I say, agreements for that.

We were successful in a certain way because we showed decrease in the legal risk. What we -- we are cleaning out this process, and we expect that for next year, we are going to reduce this by half, yes? Then this is another important driver to continue delivering better results. Those are just some of the drivers we can consider for that movement. Did I address your points?

[Daer Labarta, analyst]

Yes, that was very helpful and very thorough, Daniel. If I could ask just one other question, sorry. In terms of the pension liability rate. It's been now -- you've had a pension liability for like 2 quarters, about BRL 3 billion. Just any concerns about that? And particularly, given your capital, just how do you see that? How should we think about that?

[Daniel Maria, executive]

Okay, Tito. I would say that, certainly, we are monitoring this.

And the actual is always -- we have some variables that we have no control on that. One of them is the interest rate that discounts the cash flow. And certainly, the curve is reducing. And this movement puts some pressure, yes. On the other hand, you have the assets of the pension, and certainly, usually, when the interest rate goes down, the assets tends to go -- goes up. And you see, for instance, probably Bovespa is the best proxy since most of the investments are in Brazil is showing records.

Then I would say that one thing tends to compensate the other, but it's too early to say because since you take into consideration the price of the assets in the last day of the semester, yes. There is a downward trend due to the interest rates, but it's manageable, and we are confirming at this. But it's early to say what would be the impact.

[Operator]

Our next question comes from Jorge Kuri from Morgan Stanley.

[Jorge Kuri, analyst]

I wanted to get a view on your effective tax rate for 2020. And we saw a pretty big jump between 2018 and 2019. And so it's just a bit hard to figure out how that's going to play out next year, and given the very low tax rate that you've had for the first 9 months of this year, that could mean limitation on your earnings growth next year. Any comments would be appreciated.

[Daniel Maria, executive]

Okay, Jorge, thank you, thanks a lot for the question. I would say that structurally we see our tax rate, excluding the equity income, in the region from 18% to 23%, and why this is -- we see -- we understand that business structure. Certainly, we have some of the portfolios that are related to the agribusiness. This brings some tax shield for us and reduces the tax rate. We have one situation when you compare '18 to '19 is the better usage of the tax shield due to the IOC. You know that there is a limit to pay IOC -- pay the shareholders through the IOC.

As we go further and we increase the results, we approach those limits, but we are paying fully as IOC. And certainly, our peers, they are not -- they are above that limit when they need to pay part of this. Then this distorts a little bit the tax rate, those 2 components. I would say that comparing '18 to '19 is tricky because you have so many things happened in those years that makes more difficult. For instance, we have the social contribution tax in different levels, '18 and '19. In '18, we had -- we were consuming tax credits at the rates and the appropriated tax credits at a different rate, that normally increases the tax rate. For that reason, we did the exercise to find what is the structural rates.

Talking about the future, certainly, we are going to fine-tune those structural rates for next year, and we are going to address the market as we have released. But I would say that the best proxy we have in our days is 18% to 20%, and considering that we are going to have a higher social contribution rate, just adding up 4 to 5 basis points to this range. Is it clear?

[Jorge Kuri, analyst]

Sorry. So if we think about your effective tax rate. So exactly what you're going to pay, including all of the different moving parts that you talked about, what do you think is the right effective tax rate for 2020?

[Daniel Maria, executive]

I think 23 to 28, adding a 4 to 5 basis points comparing to the structural rate. We are going to fine tune this, this is the best proxy we have nowadays.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. Mr. Daniel Maria to proceed with his closing statements. Please go ahead, sir.

[Daniel Maria, executive]

Thank you all for the attendance. And please let us know if you need additional follow up, and have a nice weekend. Bye.

[Operator]

That does conclude Banco do Brasil conference call for today. As a reminder, the material used in this conference 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.