Banco Bradesco SA
BOVESPA:BBDC4
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Banco Bradesco SA
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Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's Second Quarter 2019 Earnings Conference Call. This call is being broadcasted simultaneously through the internet in the Investor Relations website, banco.bradesco/ir-en. In that address, you can also find the presentation available for download. [Operator Instructions]
Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements.
Now I'll turn the conference over to Mr. Carlos Firetti, Market Relations Director.
Good afternoon, everybody. Welcome to Bradesco's Second Q '19 Conference Call. We have today with us for the call, our CEO, Octavio de Lazari; our Executive Vice President and CFO; André Cano; Bradesco Seguros CEO, Vinicius Albernaz; and our Executive Director and Investor Relations Officer, Leandro de Miranda.
For starting the call, I turn now the floor to them.
Hello, everyone. Thank you all for joining our second quarter 2019 earnings review conference call. We are very pleased to continue presenting solid results, despite the many challenges facing the economy. Our business model and team have shown flexibility and excellence to try in every single market that we play. We are proud of our accomplishment and confident that we shall keep this path as we accelerate our investments in people, technology and services.
We'd like to thank all of our employees for this outstanding performance and continuous focus on serving our clients and communities. In addition, we have special thanks to our clients who have elected Bradesco as their bank of choice.
The economy was far weaker than expected which led us to lower again our 2019 GDP growth expectation. The increased volatility jeopardized the confidence level of consumption and investment, resulting in tougher environment for banking. Despite the challenging short-term scenario, we are optimistic about the future.
The pension reform thus seem to be on track in the Congress, as it has already been voted and approved with major support in the first round in the lower house, which may allow companies to finally focus on their long-term goals without being blurred by the macro fiscal uncertainty. Therefore, we believe that investments in growth are likely to resume over the following month.
Our outstanding performance this quarter came as a consequence of several changes that we have been implementing for quite a while, which allowed us to grow the credit portfolio, despite economic scenario with excellent credit quality, while maintaining our cost under control and with a great performance of our insurance operation.
On Page 3, we bring some of our financial highlights. First of all, an all-time high net income of BRL 6.5 billion of growth, higher than 25% year-on-year. The operational results grew 11.1% in the annual comparison. Our ROE reached 20.6% in the quarter, an expansion of 220 bps, even with a strong expansion of our shareholders' equity in the quarter that grew 18.2% year-on-year to BRL 133.6 billion.
Our expanded credit portfolio grew 2.2% this quarter and 8.7% compared to the same quarter last year. And the Individual's portfolio is a highlight, with a strong growth of 14.8% year-on-year. As expected, credit quality continue to improve with the over 90-days delinquency ratio falling 4 bps, confirming our view of this optimal position for lending.
Finally, our Tier 1 capital ratio reached strong 15%, a growth of 60 bps this quarter and 360 bps in the annual comparison.
Moving to Page 4, we bring the other highlights of the quarter. The first one is the strong growth in the individual's credit portfolio with expanded 14.8% with the annual comparison. We are gaining market share in different lines, such as personal loans, payroll loans, mortgage and auto financing. We are achieving this growth with excellent credit quality, as shown by the new vintages. This growth is a reflection of the commitment in amortization of our teams as well as evolution of our processes and models.
The second highlight is the acquisition by $500 million of BAC Florida that we have announced it in the beginning of the quarter. Our objective with this move is to strengthen our positioning in the high-income segments, pretty much wealth management offering to our customers' checking accounts, cards, mortgage financing and other services in U.S. The conclusion of the deal is pending regulatory approval, but we are very confident it shall come in the very near future.
The third highlight is the SME segment, which awarded the first bank to launch the digital account. Credit origination through digital channels, mobile and Internet as an expansion in the first half 2019, growing 53% in the Individual segment and 44% in the Companies segment, while our checking account customer base continues to expand. In the annual comparison, we grew 1.1 million customers, and this last quarter had 400,000 customers.
Finally, Next reached 1.1 million accounts in the quarter, and we are confident that this shall exceed their target of 1.5 million customers by year-end.
On Page 5, and on the next page, we bring some numbers of our operations in the digital arena. As mentioned in the previous slide, Next reached 1.1 million clients and 77% were not Bradesco clients. We aim to reach more than 1.5 million by the year-end. And our CEO is very confident that we shall reach even 2 million clients by year-end.
In Bradesco group, we closed this quarter with 16.4 million digital checking accounts clients, an expansion of 1.9 million in 12 months.
As you can see on the next page, BIA, Bradesco Inteligência Artificial, is our artificial intelligence, has more than 144 million interactions and 1.4 million customers through WhatsApp.
Credit origination through digital channels in the Individual segment totaled BRL 11.8 billion through the first half, a growth of 53% in the annual comparison. In the Companies segment, it totaled BRL 14 billion with the growth of 44%. These numbers show that our traditional banking clients are quickly adopting the digital channels even for credit products.
Turning to Page 7. A great pride of ours, Bradesco Foundation is one of the largest educational projects in the world. The foundation has a budget of approximately BRL 650 million, bringing benefits to more than 92,000 students with basic education of high quality.
On Page 8, we show the value that add to the Brazilian society. In terms of value-added, out of BRL 33 billion, 30% was paid to government and 29% to the compensation of our employees.
Moving to the financial results of the second quarter. We see here on Page 10 the growth of the financial margin, and the annual comparison was 7.1%.. And in the first half, it was 5.6%, close to the center of our guidance.
Extended loan loss provision reduced 3.2% in the quarter to BRL 3.5 billion, remaining on the upper part of our guidance. We are doing really well in insurance operations, with expansion in the operational result of 16.9% in the first half. Our net income grew 23.7% in the first half and operational results, 13.3%, show a solid performance of the organization as a whole. I will go into more details on the following page.
Moving to Page 11. Our ROE grew again to 20.6%. This is the fourth quarter in a row with expansion in our return, even with our shareholders' equity presenting a significant expansion of 18.2% year-on-year. We understand that ROE may remain at this level or even expand a little for some time as our CEO has pointed out. Our ROA was 1.85%.
On Page 12, we may see that our credit portfolio grew 2.2% this quarter and 8.7% when compared to the same quarter last year. The acceleration of the annual comparison is mainly due to a larger comparison base in the second quarter 2018. I would like to remind you that in the second quarter 2018, there was a large expansion in the corporate portfolio mainly due to devaluation of our currency by 16% and also due to a large transaction of BRL 5 billion this quarter with a great Brazilian company. As highlighted earlier in this call, the Individuals portfolio presents a growth of 14.8% in the annual comparison with highlights to personal loans, which is growing 29.2%.
Payroll loans grew 23%, car financing grew 17.5% and mortgage growing 15.9%. It's really an incredible year, so far. The good performance of the individual segment is a consequence of our market positioning, improvement in credit operations, evolution of [indiscernible] models with an intensive use of data and not the -- our highly motivated sales force.
In the Companies segments, in addition to the effect of the comparison base that we have already mentioned, the operation suffers from low levels of investment by companies. And we understand this line should pick up with the improvement in the economy.
In the SME segments, the growth is also affected by reallocation. In the first quarter '19, approximately BRL 6.7 billion in loans from the SME segment to the corporate segment as part of this new segmentation in companies, which increased the growth in the corporate portfolio and reduced in the SME portfolio.
Turning to Page 13. Credit origination per business day continued to have a good evolution. In the individual segment, the growth was 17.3% in the quarter and 39% year-on-year. In the Companies segment, the growth was also good, 15.4% in the quarter and 21.9% in the annual comparison.
On Page 14, we present our NII, which grew 2.7% in the quarter and 7.1% in the annual comparison. The highlight is on the NII to market operations that presented a growth of 7.3% in the quarter and 25.9% in the annual comparison. The annual comparison is also impacted by the recomparison base in the second quarter of 2018. The NII from client operations grew 1.9% in the quarter and 4.2% in the annual comparison. It benefited from the credit portfolio expansion, changing product mix and [point of sale of days] in the quarter, offsetting the reduction in the average spread. We understand that this alignment continue to present positive performance as a consequence of the growth in the current portfolio, despite the trend of spreads contraction. We expect an acceleration of this line during the second half.
Turning to delinquency ratios on Page 15. You can see that it continued to have a positive evolution in all segments, in line with what we have been pointing out in previous quarters. We still see the possibility of further improvements, but we are approaching the end of the amortization process of the credit cycle. We hope that it comes by the year-end. The strong loan growth in the Individual segment reduced the room for improvements.
As you can see on Page 16, NPL creation has increased this quarter, impacted mainly by Individuals and Corporate segments. In the Individual segments, the impact is related to the growth of the portfolio. Expanded loan loss provision improved to BRL 3.5 billion this quarter, representing 2.5% of the expanded credit portfolio, the best level ever in our historical series. We still see room for reduction in the provision levels in the coming quarters. However, the expansion in the individual [indiscernible] portfolio reduces space for reductions, but should be compensated somehow by a positive impact to the financial margin.
Fees are presented on Page 17. The growth in the quarter was 2.6% and the annual comparison 1.3%. The checking accounts line has a positive evolution, growing 9.5% in the annual comparison due to the growth in the customer base and evolution of our segmentation. The pressure on fee income is related to cards revenues, which are pressured by the competitive environment on the acquiring business and a reduction on that cards interchange fees. Asset management revenues, which are pressured by the reduction on management fees. Loan operations revenue is pressured by a reduction in the volumes of sureties and guarantees. We understand that 2019 is a year of adjustments in this line. And we may resume growth in fee income by 2020. With a stronger economy and with an adjusted revenue base, we are positive with Brazil.
On Page 18, we bring a table with our operational expense, which are above the guidance, presenting a growth of 6.2% in the first half. We had an excellent performance on administrative expenses, which grew 3.3% in the first half and 2.2% in the second quarter or a year basis. Below the inflation, the performance would be even better, have not we made an anticipation of payments with -- through discounts or between the negotiation of accounts. It was very positive for the bank as a whole. In personnel expenses, we had a growth of 9.1% in the first half. The main pressure cames -- comes from the non-structured portion, mainly from higher profit-sharing provisions related to extraordinary performance program as we continue to make provisions, assuming maximum performance and from higher provisions for labor claims. Expenses would be growing by 4.6% if you were to exclude the effect of this payment anticipation on higher profit-sharing provisions related to this extraordinary performance program. So pretty much, we believe that it shall keep them below inflation as time goes by.
Moving to Page 19, insurance results. We had, again, this quarter a very good result with operational results growing 16.9% in the first half and 11.6% in the annual comparison. Bradesco Seguros net income was BRL 1.83 billion, a growth of 1% this quarter and 15.9% in the annual comparison. Insurance premiums grew 3.3% year-on-year, with highlights of health insurance segment, which presented growth in number of customers. Technical provisions totaled BRL 265 billion, expanding 5.2% year-on-year. A few more topics on insurance are presented on Page 20.
In the annual comparison, net profit in the first half grew 16% and ROE reached 23.6%. In the second quarter, overall claims ratio has an increase and reached 72.5%, but it's still lower than the same figure in 2000 -- in the second quarter of 2018. The best way to see it is on a semi-annual basis. The main impact on the ratio was caused by health segment, mainly due to the lower impact in the first quarter as a consequence of Carnival in the end of quarter and due to the higher quantity of business day in the second quarter. For a better full comparison, as I have point out, we should consider that first half total claims ratio is reduced from 74.4% in the first half 2018 to 70.5% in the first half 2019. We are confident that claims ratio have a better performance in '19 than in 2018.
Turning to Page 21. Our capital ratios continue to evolve, as you can see, organically through repayment profits. Core equity Tier 1 -- and Tier 1 both expanded 60 bps in the quarter.
And finally, on Page 22, we bring our guidance, which had no change. We understand that considering the full year, we will be within the guidance range on credit portfolio growth, total NII, expanded credit provision expenses and fees. Our insurance operational results will be better than the top of guidance range, which is 9% growth, we shall increase it by far. In the line of operating expenses, we will also be slightly above the range, with expenses growing little bit more than 4% due to legal claims and also the compensation program that we have point out.
In general terms, the current performance does not change the returning targets, implying the guideline -- the guidance initially released in January.
Therefore, we now conclude the presentation. We are open for your questions. Thank you very much for your attention.
[Operator Instructions] Our first question is coming from Mr. Tito Labarta with Goldman Sachs.
A couple of question. First, in terms of your asset quality, you continue to improve and cost of risk improving. You said it can improve a little bit further, although you did mention that NPL creation increased a bit in the quarter. So just trying to understand the dynamics there a little bit. If you do see some further improvements, how much? And when does it revert to when we think about like the cost of risk? How much lower can you get in that? And what's a more normalized level as the year progresses? And then my second question in terms of fee income. We continue to see pressure in the cards, in asset management and also collections. Just curious, particularly, I guess, in the card income there. We did see a slight pickup in the quarter. Do you think most of the pressure has subsided from the acquiring business? I mean, we sort of see little volumes are up a bit yesterday. Do you think the pricing pressure has now subsided, so it makes you more comfortable with the card fee income business here?
Tito, thank you very much for your questions. Firstly, on the asset quality, we are pretty much pleased with the growth that we have had in Individuals and SMEs. That pretty much represents the healthier possible portfolio than we could have. And when you compare our provisions levels, you're going to see that, pretty much, we are decreasing the provisions, either in relative or absolute terms. That means that the new vintages are by far better than the old ones. So we believe that the asset quality is improving and it shall continue this way at least for until year-end.
Regarding to NPL creation, we see that the provisions for an amount that is higher than 90 days, it's going -- it's improving dramatically. And the volumes, we do not see them growing in the Individuals and SMEs on -- when you compare to a relative analysis. And so therefore, we understand that we shall get more and more alpha when you compare the return of these 2 portfolios when compared to the provision. So we understand that the spreads are pretty much there to stay.
Regarding to fees, we can make some sort of a split here between -- among the 3 issues that you have point out: Cielo; asset management; and underwriting. First of all, on asset management, we have an adjustment in the management in performance fees, but mainly on management fees due to the decrease in the base rate of the country, right? So pretty much, most of the portfolio was comprised of fixed income funds. And therefore, the management fees should be adjusted to the new reality of interest rates in the country. Now we are changing the mix more and more to equity funds to [Foreign Language] that are hybrid funds, including debt and equity. And we expect the management fees to stay there in fixed income and to have an improvement in management fees to those new asset classes. And as the environment in the country is getting lower returns and interest rates, we understand that clients will get eager to get higher returns in that new base of investments.
On underwriting, we also benefit from a stable economy. As we have move on we shall see more and more IPOs, more and more equity and debt offerings. And again, on Cielo, we understand that they have the right strategy. We understand that they have said that they are there for dominance. They are willing to keep their market positioning. And therefore, they have made the sacrifices, and they are increasing their sales force. We are positive with their strategy to provide the full support to the senior management.
Okay. That's helpful. Just I guess one follow-up on the asset management fees with the expected further reduction in interest rates this year. The -- that's already priced in, do you think? Or could there be a little bit more pressure just from...
We don't see it. We do not see more pressure. Pretty much, the pressure that we have had in the last couple of years was due to the decrease in the base interest rates. And most of the funds, they are mutual funds or fixed income funds. So in this case, they have to make adjustments. From this point on, we have pretty much reached the balance in the economy, a balance in the industry, and we expect this to get stable in the near-term fixed income funds and to have a higher and wider offering of equity and hybrid funds, which shall increase the management fees and, we hope, the performance fees as we do our job properly.
[Operator Instructions] Our next question is coming from Mr. Jason Mollin with Scotiabank.
My first question is a follow-up on fees. So I get that lower rate to put pressure on asset management fees, but can you talk about competition and new entrants for asset management? And could that be another leg of pressure on fees? And we've seen your checking account fees actually grow the first half of '19 versus first half of '18 by almost 8%. We've seen some new entrants cutting -- offering free accounts. Do you think that we could see pressure there as well? That's been actually one of the saviors to get to this 2% growth for the first half '19, almost 2% first half '19 versus first half of '18. And then maybe if you can also talk about, it's a smaller number, but what's driving the growth in the consortium management fees?
Thank you, Jason, for the questions. Well, let's start from the first one that is regarding to the asset management fees, right? We believe that we had some pressure from our competition in the last 2 years, pretty much because we were one of the leaders in this -- the industry. So we presented new funds with the adjusted management fees. We were in the process of making the adjustments. Right now, we have made all the adjustments when compared to the whole competition. We have this database and this intelligence, and we do it on a weekly basis. So we do not see that we are lacking any sort of competitiveness features right now. We believe that we are ready to grow. And our management fees shall not decrease any longer. We expect that we shall have an inflow of funds to be managed it by brand, especially because of the interest rate scenario they have in the country. You have seen how much domestic investors are active and how much retail has been -- becoming more and more important, especially when you see the brokerage houses movements, bringing high net worth individuals to this game.
Regarding to checking accounts, Octavio has made this point earlier that the way we see it is that we shall present competitive packages to every single client of ours, but always take into account their profile, their needs. So we believe that those fintechs or new competitors will be entered into the market. They are not providing all the full service, all the full package that we present. So in this sort of market, we have been more and more competitive. And a very good example of that is that for the first year in a row, we have been able to grow in the traditional platform the number of net accounts. So pretty much, we are having more and more clients in our branches, in our traditional bank as well as in our latest digital bank. If we are really -- if we are prepared to lose clients for innovative digital bank, we shall be losing to Next. But our experience is not showing that. Our experience is showing that we are growing both. Both platforms are very strong, and they are trying to serve better and better our clients. That is the reason why we are confident we shall keep on growing.
Regarding to pressure on growth, we believe that as economy gets back on track, we shall see clients get more and more banking services. And we are very well positioned, as you could see the first semester, not only to get market share from state-owned banks, but also from the other private held banks. So we are positive with the scenario. And as Brazil gets the level of growth that everybody is expecting, we shall be there on a very leading position.
That's helpful. On the -- in terms of your digital strategy, and thank you for the update on the digital customers and initiatives, can you tell us what Bradesco expects to see -- where Bradesco expect to see the greatest impact of the digital transformation in the next year or 2? Is it in cost or revenues? And can you help us quantify the impact?
Okay. First of all, we all used to think that tech knowledge would eliminate jobs. And experience has proven the other way around. Tech knowledge allow us to have different jobs, different revenue streams and allow us to serve our clients even better. And that's what our focus is. Our focus is on our clients. So digital channels have allowed us to grow our clients base even faster, have allowed us to grow to serve our clients with better products and are creating leverage to the managers in our branches to be focused more and more on investments and new business. That's where we think that the technology will drive us. The technology will not only drive us to reduce fixed cost, but mainly to improve revenues and to get more and more competitive.
[Operator Instructions] Our next question comes from Mr. Nicolas Riva with Bank of America.
One question on income taxes, if you can remind us where we are in terms of the approval in Congress of increasing income taxes for the banks. When do you think this will go into effect? And also what would be the impact on your capital from the onetime adjustment of your net deferred tax assets?
Thank you, Nicolas, for the question. We know that there further discussions, but there is nothing on track or in process right now. The information we get so far is that the government is willing to increase activity. And if they decide to increase income tax on dividends, they will reduce our tax brackets. So they are willing now to keep the money for the bank and to allow us to be more and more productive to the country to our clients. So by the end of the day, it's going to be a good benefit for the society as a whole and for investors because we do not need to get dividends. You can get capital gains and you can sell your stock in the secondary market. You're going to be much better off.
On top of what Andre said, the discussion on the social contribution, as you know, is part of the pension reform. It was already approved in the first round in the lower house and should be voted probably early August in the lower house. So the approval, if they keep it, should be maybe September, October, the increase in the social contribution.
Okay. And then in terms of the amount, is there some prevalence in [indiscernible], I guess, from your Portuguese call about BRL 6 billion.
Yes. Basically, from the increased tariff, from the increased in the social contribution, if it happens, from 40 to 45, there is a revaluation of tax credit and the value of this revaluation will be BRL 6.4 billion. Our amount of tax price increased BRL 6.4 billion. There's no impact on BIS from the revaluation.
Thank you, all. We are finished in the call.
And ladies and gentlemen, since there are no further questions, I would like to invite the speakers for their closing remarks.
Well, thank you. I would like to thank you once more for making the time to be with us. And we are going to be open for questions and discussions afterwards as our Investor Relations Department is here to provide you on the information as they have always done. Thank you so much. Have a great day.
That does conclude Banco Bradesco's conference call for today. Thank you very much for your participation. Have a good day.