Banco Bradesco SA

BOVESPA:BBDC4

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco Second Quarter 2021 Earnings Conference Call. This call is being broadcasted simultaneously through the Internet in the Investor Relations website, bradescori.com.br/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, Business Controller and Market Relations Director.

[Carlos Firetti, executive]

Hi, everyone. Welcome to our conference call for discussions of our second quarter 2021 results. We have today with us here in our headquarters, our CEO, Octavio de Lazari, Jr.; our Executive Vice President; André Cano; our Executive Director and IRO, Leandro Miranda; our CFO, Oswaldo Fernandes; the Bradesco Seguros CEO, Ivan Gontijo; and Banco Next Chief Executive Officer, Renato Ejnisman.

Now I turn the floor to Leandro.

[Leandro de Miranda Araujo, executive]

Thank you, Firetti. Good morning, everyone. Thank you for your interest and for joining us on our second Q earnings call. This quarter, we saw a new surge in the pandemic, which unfortunately affected a significant number of residents. However, there was also a great acceleration in vaccinations, which is the only real solution for the COVID-19.

The current pace is good, and it shall accelerate even further. Over the coming months, this should help Brazil achieve the benefit seen in the countries of more advanced vaccination phase. We see continuous recovery on the current economic theories even with this fight in COVID case in the beginning of the year and especially now with vaccinations ramping up.

We foresee a growth of 5.2% of the Brazilian economy in 2021. For unemployment, it's rapidly rising, supporting loan growth and keeping delinquency ratios at historically low levels. Fiscal risks have decreased with the growth, leading to a positive surprise in debt-to-EBITDA ratio, and thereby, it may be an appreciation of the real.

On Page 3, we begin a discussion on our numbers. Our income in the quarter was BRL 6.3 billion, with the accumulated return reaching 18.2% over 6 months. The loan portfolio expanded 3% in comparison to the previous quarter and about 10% year-on-year. The Tier 1 ratio reached 14.1%, an increase of 0.5 bps Q-on-Q and 1.6 bps year-over-year, which indicates a very comfortable capital level. So far, this year, we have already distributed BRL 6 billion in the form of interest on shareholders' equity. This brought our payout to 52%.

We feel that our second quarter results had a good level, driven by a robust performance in banking activity. The insurance income was adversely impacted by the increase in health and life insurance claims due to the impact from new spikes of the pandemic and a lower financial income due to the variations in marketing indices. The fact that we were able to deliver a strong consolidated income despite the heat taken from insurance activities demonstrate the strength of our balance sheet and our organization's ability to diversify our revenue streams.

Moving now to Slide 4, we present our income statement. As we mentioned before, the lower quarterly income primarily reflects the impact on the insurance business, which was heavily affected by the claims related to COVID-19 despite the [ evolution of the import sale to revenue area ].

Looking just at the income from the banking structure, the growth in the quarter was up 16% compared to the first Q. In later comparison, the income goes 125% as the second Q was the most affected by the pandemic. It's worth noting that the banking structure's income in the second Q was 22% higher than the second Q '19.

The total NII was up 1% in the quarter and down in yearly comparison because the market NII was rather high in the second Q '20, thanks to the robust market in COVID activities.

ALL expenses came at a very good level, posting a reduction of 10.7% Q-on-Q. This comes from the positive performance in the funds and our lower models. We would like to point out the sharp improvement in costs despite the COVID increase.

Finally, when we compare our operation this half year with the first 6 months we have in 2019, it's possible to notice that we have had significant evolution and that we are expanding. Total revenues are up 6% and reflect the growth in the portfolio and customer base, more than absorbed the [indiscernible]. Expenses fell 7.3% even with the high inflation accumulated experience. And as a consequence, the efficiency ratio reached 45.7%, an improvement of 3.7 percentage points.

We will now take a look at Slide 5. Our funding activities [indiscernible] continued to perform well. Funds from clients grew 4.5% in the annual comparison, particularly in demand deposits and savings. They are currently an important source of funding for our mortgaging and operations.

On Slide 6, we talk about the expanded portfolio, which grew 9.9% in [ '21 ]. We posted a sharp 21% higher in individuals and 28.7% in SMEs. For large companies, the annual comparison was somewhat tempered by the solid growth of working capital lines that we started with organic and greater access to the capital market that we started. Some lines report the attractive levels of growth over 12 months. In real estate funding, it grew by 40%. This performance reflects improvements in our contracting process and the strength of our origination channels, in which I would like to highlight our digital variant that originated around [ 1,700 ] transactions in the first semester of 2021, 4x higher than last year. Therefore, a channel that is increasingly gaining share in our loans origination.

Payroll-deductible loans grew 19.8%, with origination of concentrate on our own terms. Agricultural loans rose 18.2%, an increase of BRL 3.1 billion for companies and BRL 1.2 billion for individuals, reflecting the correlations we have on farmers through our original agricultural platforms which we have reinforced with agricultural engineers, along with the distribution of our branch network, which is privately the major agriculture municipalities.

The growth of 28.7% year-on-year reflects the reposition we made in our business resource subject, in which we treated the number of coordinators and also added 600 relationship managers. We also reviewed the small entrepreneur origination journey. We will have more news in the second half.

Finally, I'd like to highlight the origination of loans to individuals, which has been already enjoying steady growth for perhaps even for a year and now is 40% higher compared to the same quarter of the previous year. In this quarter, with the recovery of the economy, the origination of companies grew by around 25%.

Turning now to Slide 7. Our expanded ALL expenses [indiscernible] BRL 3.5 billion in the quarter, representing 1.9% of the portfolio. The level was consistent with our guidance. The reduction in cost of risk is a consequence of the positive performance in delinquency ratios and the growth in normal risk transactions over the last few quarters, such as real estate financing, payroll deductible loans and [indiscernible]. The [ loan coverage ] ratio remains at rather high levels and is expected to continue above pre-pandemic levels up to the end of this year. The coverage ratio, including the renegotiated portfolio, remained virtually stable.

Turning now to Slide 8. We see that delinquencies are remaining under control, in line with our expectations. The 90-day ratio remained stable, with the 10 bps improvement in individual segments. The 15- to 90-day ratio showed signs of improvement in all segments. We believe that the delinquency ratios are expected to convert to pre-pandemic levels by early 2022. This past performance can be explained by a marketing portfolio management. The progress of our loan models [ enjoins co-activation ] as well as renegotiations that are extended on the clients. I would like to highlight that the NPL creation this quarter is at the same level of 2019.

Moving to Slide 9. The extended portfolio continued to improve for 36% year-on-year. From a balance of BRL 41.3 billion, only BRL 3.5 billion are in arrears for over 30 years. The possibility of amortization remained available to clients in the second quarter, but the demand was low.

Coming to Slide 10. You can see that our renegotiated portfolio declined by BRL 900 million in the second period this year after holding a stable position in the first year. These shows our trend towards more normal loan conditions. We maintained a high level of provisions, maybe the highest compared to our peers, equivalent to 62% of the portfolio. The new considerations in the renegotiated portfolio continued to be stable in the quarter but are expected to climb by the end of the year, returning to pre-pandemic levels.

Coming now to Slide 11. The total NII grew 1% over the quarter. Year-on-year, there was a drop of 5.7%, thanks to the strong market NII in the second quarter of the previous year. The quarterly growth in the client NII is mainly driven by the expansion of the business portfolio, mainly in personal loans, credit cards and payroll deductible loans, which more than offset the slowdown in spreads motivated by market dynamics. We expect spreads to start rise. Indeed, it might even improve during the second half due to the COVID improvements.

We now turn to Slide 12. We posted a strong performance increase. We are seeing an intense growth in the volumes transacted in both debit and credit cards, reflecting a recovered economy. For checking accounts, we were able to recover the level of revenues from our [ non-quarter ] banking correspondents due to a resumption in commercial activity. Revenues were also positively impacted by an annual growth of more than 1.7 million clients, offsetting reduction within debt and [ dock ] revenues.

In asset management, the growth over the quarter came out of the strategy to diversify into new products that have a higher added value. In addition, we experienced growth in our net funding, both in our own products as well as on third parties. This comes as a result of the work performed by our team of investment specialists, contributing to a net funding of BRL 17 billion in the first half of 2021 and also by higher revenues originated from prepared funds. We also highlight the strong performance in the income from consortium investment bank, benefit from the favorable market review.

Operating expenses now on to Slide 13. As you can see, our total costs fell by 4.4% over 6 months. The comparison between the quarter and the previous year is impaired by the [ COVID base ] of comparison as a number of expenses were not carried out due to the pandemic. Personnel expenses were primarily impacted by higher provisions for profit shares, which stood its stance compared to the previous year, given the 60% higher net income this year. The decline in the administrative expenses for the high [indiscernible] stringent cost control measures of [ 88.3% ]; on a GPM, 35.8%.

Turning now to Slide 14. Our insurance operations [ at Bradesco both ] grew 20% in revenues in [indiscernible] income, which was BRL 2.3 billion despite the weighted level of claims due to the events related to the pandemic. On this slide, we highlight the COVID-19 impact in our insurance operations, with costs reaching BRL 1.8 billion in the second quarter '21 and BRL 3 billion in the first half, totaling around BRL 4.8 billion since the beginning of the pandemic. The financial income in the second Q also was affected by the behavior of the ratios, which had an impact on the performance of financial investments at Bradesco. This scenario is temporary. It already shows improvement as a consequence of the vaccination, but we decided to revise our insurance guidance as well as we are going to be paying it further on.

Slide 15 gives an overview of weekly events related to the pandemic in our health care business. Here, we show the curves with the volumes of PCR tests that have been at research as well as hospitalizations for COVID sufferers during that same period. Since the onset of the pandemic, Bradesco salutes, ensuring clients took more than BRL 1.3 million -- 1.3 million PCR exams and approximately 78,000 [indiscernible]. As you can see, this graph is a good indicator for hospitalization levels, and these charts allow us to expect reduction in the short future due to the recent weak strength, although still high level.

We now move on to Slide 16. As you can see, our capital and liquidity ratios. Our Tier 1 capital ratio finished the quarter at 14.1%. And the common equity stood at 13.1%, which was an increase of 50 bps compared to the previous quarter and 160 bps compared to June 2020. The ratio is well above the regulatory means in a fairly comfortable level.

Moving now to Slide 17. We provide data that demonstrate the growth in the use of our digital channels. This year, 98% of transactions are already digital clients, using our various channels, goods and digital journeys, and an ongoing evolution towards transition to digital without performance of the branch. The most significant transaction of volumes are now in the mobile channel. The number of financial results within the first 6 months of this year reached BRL 600 million, which is 1% higher than the previous year. We also saw a record number of accounts opened for both individuals and companies.

Organic volumes are about twice as high as last year. The volume of loans coming from digital channels over the period amounted to BRL 31 billion, 21% higher than last year. Growth in the digital segments came to 54%. The number of platform requests to digital channels grew 270%. And this year, we issued 3.9 million new cards. For the insurance company, we wanted to sell 1 million products through digital channels in the first half of 2021, which represents revenues of BRL 700 billion, an annual increase of 80% compared to the same period last year.

We now move on to Slide 18, where you can see the evolution of our payments. The push we have been giving to PIX from acquiring [indiscernible] journey with [indiscernible] financial vision and contributing to improved volume of transactions. PIX is responsible for over 50% of the business transactions. We witnessed a digitization of minor transactions, given the fact that around 40% of the quality peak transactions are below BRL 50. As seen on the graphs, only processed checks and ATM withdrawls have decreased in quantity, which contributes to a reduction in our expenses.

Turning now to Slide 19. In addition to continually improving our channels, we have also made investments to BIA, our artificial intelligence that simplifies our clients' lives by providing increasingly pleasant experience. I would like to point out that we are 5 years in the use of artificial intelligence in Brazil. In this first half of the year, digital collection grew 43%, totaling 275 million transactions with clients, in which 83 million of these interactions were through WhatsApp. I'm pleased to share with you that Bradesco received for the second consecutive year, the award of Most Innovative Bank in Latin America, an award recognized by the banker magazines, reflecting all the investment and focus we have placed on innovation.

Turning now to Slide 20. We can see Agora, next and Bitz. Our digital business, as you could see throughout the presentation, posted a strong performance. Agora saw nearly 50% growth over 12 months in both the number of clients and in terms of volume under custody. Agora is getting more and more important in funding for us as well. As you can see that there is a increase of 81% in net funding. next is expected to continue to both grow in the second half, thanks to the member-get-member program and partnerships. The sign-up process has been improved, and 70% of our accounts are opened within 24 hours. next has also incorporated ShopFast that now includes a new source of revenue from nonfinancial business. And finally, Bitz, the digital wallet that we introduced last September, has already surpassed 1 million accounts.

Turning now to Slide 21. We would like to point out that we are the first financial institution in Brazil to announce our goal to achieve a balance to greenhouse gas emission by all our clients and investor companies, reaching what is known as net zero. This is an extension of our climate strategy. 15 years ago, Bradesco was one of the first to measure the amount of carbon generated at group's own operations. Overall 2019, we have neutralized 100% of these emissions. In 2020, we were also the first financial institution in Brazil to join PCAF, the Partnership for Carbon Accounting Financials. We have realized a new level of climate management, and we'd like to play a leading role in this transition in the country, engaging and supporting our clients for better business while promoting a more efficient, clean and climate [indiscernible].

Moving now to Page 22. Concerning our guidance, we considered responsible, well-balanced drivers when the year began, and we maintained expectations for all lines with the exception of insurance due to the change with the pandemic of COVID-19. We believe that we are going to see growth above the center of the range for the main portfolio as well as for fees and in the center for client NII. At the bottom, fortunately, costs, primarily due to the expected effects from the collective bargaining agreement for bank employees, net inflation accelerated sharply in the first half in the favor of the guidance for ALL expenses. The insurance guidance was reviewed downwards, only now anticipate a drop from 15% to 20% as a consequence of the drops described earlier today.

Finally, we would like to thank you so much for making the time to be with us, and we are going to proceed with the questions-and-answer sessions.

[Operator]

[Operator Instructions] Our first question is coming from Mario Pierry of Bank of America.

[Mario Pierry, analyst]

I have 2 questions. First, related to your insurance operations and especially in your guidance that you've given for the year. Basically the last year, you basically were guiding for results from insurance of about BRL 10 billion in 2021, which means an average rate of only BRL 2.6 billion in the third and fourth quarter. But when we look back over the last 4 quarters, your results in insurance were averaging almost BRL 3.1 billion, even if you already included the expenses related to COVID in the first quarter. So I was wondering, why do you expect your run rate to remain below the last 4 quarters, especially considering a higher rate generation to be positive for your financial results. So that's my first question.

Second question is related to your operating expenses. You are very close to the top of the guidance here, expenses of 4%. However, we see some significant headwinds in the second half of the year, especially related to salary negotiations. Talk a little bit about where things are in regards to annual salary renegotiations and how can you offset these headwinds in the second half of the year, especially you already closed about 1,000 branches over the last remainder, which is almost 25% of the branch network. Is there more room to reduce branches? Or the efficiency needs to then turn somewhere else?

[Leandro de Miranda Araujo, executive]

Okay. I'm going to ask Michael to read or to help me repeat your questions if I'm not able to answer all of it [ if you don't mind ] because the sound was not that clear. As far as the insurance, the first question is related to the guidance for insurance, right? So basically, in the way we see the big aspects, and therefore, we shall have better quarters from now on, especially in the fourth quarter, as we continue to grow in terms of premiums that our revenues and especially in light the number of debt has also gotten source parts. We expect that this will come more in line with the previous years. But of course, this time will come gradually, and it also depends on movement of mutation here, how it's going to evolve in terms of vaccination.

Regarding to the operating expenses, these rates contemplates over the employees of personnel adjustment that we shall have in the second semester. We believe that we are going to continue to reduce expenses overall despite of this increase in salaries. Because basically, as of what was spoken out earlier, we continue to close branches, and we continue to transform those branches into point of sales or business units. We continue to reduce our administrative expenses as well. So we understand that we are going to be able to keep the lower part of the balance.

[Mario Pierry, analyst]

Okay. Sorry about the quality of the sound. It's a little bit hard for us to hear as well. But so just to go back on insurance, right? If I look at your first quarter results, the insurance had like BRL 3.1 billion. And we already have very elevated costs related to COVID. So -- but if we think about it, your financial results should improve. And even, if your COVID expenses remain elevated in line with the first quarter numbers, I was just wondering why we shouldn't able to average BRL 3 billion per quarter in the second half of the year.

[Leandro de Miranda Araujo, executive]

Yes, Mario, basically, we are assuming in the guidance that we continue in the path to normalization in the second half. For sure, we have to do the disclaimer that, as you know, there is a lot of uncertainties on how it's going to progress. But our view is this path to normalization, the third quarter is going to be better than the third quarter that probably got a lot of the cost of claims that came from the peak, but it's still not a normal quarter because there are a few costs that should be impacting it. We expect a gradual convergence of the inflation index that impacted the results, so reducing the negative impact in our financial results, but that's also something that we are cautious on forecast. So I think you should take our guidance as one that takes a view of that we are going to a normalization but not a total normalization from the beginning of the third quarter. It's something that will happen with some graduality.

[Mario Pierry, analyst]

Okay. And just to follow up on the insurance also. Your ability to increase prices going forward for premiums and for your plans, how do you think about that going into next year?

[Unknown Executive]

Well, I think we are going to have a couple of benefits there. The first one is that with the improvement of the economy, pretty much companies have Bradesco's ability of a premium plan for their employees. So we have seen that we have a very high correlation in sales of our plans as the economy is getting better. That's the first one.

The second one is that we have the plan that really affects the customers. So the plan that you have seen here hardly ever would be accepted in other insurance companies. That's the reason why more and more people are buying the plan from us, so it's a matter of incentive in the clients. And therefore, we shall be keeping on the increase in revenues. But of course, the market is going to depend on the price. There is no way that we can circumvent that, but the quality is being well appreciated by the markets.

In addition, we are presenting a very important growth through digital channels in the first half alone. We have a little bit more than a million insurance items that were acquired digitally. We see that trend continue. Also, as Leandro pointed, we see the perception of value of insurance for customers increasing, given the uncertainty we have seen and the risks perceived during the COVID crisis. So we see a solid demand for life insurance as we understand health insurance. We have a premium plan. So I think even if the economy has not really fully recovered, this -- the kind of premium growth we are experiencing already starting to show an encouraging trend.

[Unknown Executive]

Yes, it's entirely easy to see how the digital channels are improving the sales [indiscernible] in there. And we are using digital channels, not only the bank but in all of our platforms. Agora is going to start to sell also, to offer insurance products to our clients. So more and more, we are attracting the different pools of clients that we have in order to have a base of more than 7 million clients for digital channels, but from different platforms. So we can see the best from them.

[Leandro de Miranda Araujo, executive]

Okay. Thank you, everyone, for being with us. Thank you very much, everyone, for making the time to be with us. Have a great day.

[Operator]

That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a great day.