Banco Bradesco SA

BOVESPA:BBDC4

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Bradesco's Second Quarter 2022 Earnings Conference Call. This call is being broadcast simultaneously through the internet in the Investor Relations website at 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, Business Controller & Market Relations Director]

Good afternoon, everybody. Welcome to our conference call for the discussion of our second quarter results. We have today with us our Chief Executive Officer, Octavio de Lazari Jr.; our Executive Vice President and CFO, Andre Cano; the Executive Director and IRO, Leandro Miranda; Osvaldo Fernandez, Executive Director; Ivan Gontijo, Bradesco Seguros CEO; Renato Ejnisman, Banco Next's Chief Executive Officer; Curt Zimmermann, Bitz Chief Executive Officer; and Carlos [indiscernible] Navis, Banco [indiscernible], Chief Executive Officer.

Now for starting the presentation, I'll turn the floor to Leandro Miranda.

[Leandro Miranda, Managing Executive Director & IR Director]

Thank you very much, Firetti. Good afternoon, everyone. Thank you for taking part in our second Q '22 earnings conference call. The scenario has remained quite complex in this quarter with persistent high inflation and the need for monetary tightening in major global economies. Initial concerns turned into risk of global recession at the end of the quarter.

In Brazil, high inflation, the consequent impact on income were part of the dynamics that affect the economy during the period, including generating new physical pressures. Despite this outlook, the Brazilian economy is a bit better, which led us to increase our GDP growth expectation to 2.3% in 2022. The cycle of rising interest rate in Brazil has already advanced rapidly. This has led us to report a less optimistic view for 2023 with a 0 gross projection for GDP.

We saw a solid result in second Q 2022 with a net income of BRL 7.041 billion and an increase of 3.2% compared to the previous quarter, representing an ROE of 18.1%. The loan portfolio also posted an evolution, expanding by 2.5% compared to the first Q '22 and 17.7% compared to the second Q '21. The more expressive annual advance occurring portfolio for individuals with a 20.2% rise over 12 months.

Within this portfolio, credit cards expanded by 46%. The growth at the end of the period is expected to be lower, in line with the guidance mainly due to the comparison basis. We point out of the performance of client NII that grew 7.1% in the quarter. The market NII continues to be pressured by the impact of Selic increase on our ALM position. This pressure is expected to continue throughout 2022. But in 2023, we expect market NII to resume growth.

The insurance business posted a BRL 3.7 billion income in the quarter, an increase of 135% over 12 months, explained by the comparison basis with last year and 12.8% in the quarter. Fees performed solidly with an increase of 6.7% on an annual basis, benefit primarily by the strong performance in line of credit cards, which favored by client base growth and by higher spending.

Despite the challenges brought by inflation, total costs were well controlled. Total expenses grew 4.9% year-over-year, in line with our guidance. We have been able to offset much of the inflationary pressure through our efficiency actions. And this growth that we have had includes investments in our digital initiatives as well as additional reinforcements in investment advisory, technology and data science teams.

We will analyze our performance in relation to the guidance later, but we can report that we're able to maintain a performance that was consistent with what we have proposed.

Moving now to Slide 3. We present the earnings evolution considering the domino variation of each line in the period. In both quarterly and annual comparisons, we had expansion in client NII, fees and insurance. This growth was more than enough to absorb the drop in the market NII which is currently pressured by the high Selic and higher credit provisions, which are a consequence of delinquents returning to historical levels and growth in high-yield credit lines.

We will now take a look at Slide 4. The loan portfolio evolved in line with our expectations. Originations for companies for business day was higher, primarily due to the base of comparison which was affected by the second wave of the pandemic last year, and it's mainly concentrated on shorter lines.

In the individual segment, there was lower demand for longer lines such as mortgage and natural caveats in credit concession. We have seen a significant annual evolution in consumer financing lines. These are lines with higher spreads and have favored the growth of client NII. The most expressive movement occurring in the credit card portfolio with a 7% hike in the quarter and 46% in 12 months.

The growth of the renegotiated portfolio is a reflection of the advance in the credit portfolio and also of the origination mix with a higher share of more profitable lines.

Turning now to Slide 5. The cost of risk increased slightly in this quarter and represented 2.5% of the portfolio, reflecting the origination mix plus the higher delinquency in retail both in individuals and small companies. The early delinquency remained at the same level as the previous quarter, and the over 90-day delinquency rate grew by 30 bps, reflecting this increase in retail delinquents. The large company segment continues at historical lows. Aligned with the projection we mentioned during the first quarter's earnings call, the coverage ratio showed the reduction, given that we had anticipated provisions in 2020, which are now being consumed with the effective arrears of some of these credits.

Our projections is still point to defaults growing in the second half of the year, depending on employment and income conditions, we expect the coverage ratio to remain consistent at around 200% by year-end.

Turning now to Slide 6. This slide includes some charts that are relevant to credit dynamics. Overall, the employment levels continue to show good growth, and the unemployment rate has been dipping and has reached the levels we saw in 2015. Real wage mass have improved, which also reflects the increase in employment and the transfer of inflation to wages, due to the collective agreements. It's important to highlight this proprietary information, illustrating our clients' income commitment to credit sourcing, considering both transactions at Bradesco and also with other institutions. We see a relatively small increase in income commitment with credit servicing.

Now we go to Slide 7. The client NII continues to put a good expansion, both in the quarterly and annual comparison, reflecting the rise in loan portfolio by the higher yield lines, plus the growth in revenue from funding. The market NII, as we point out in the previous quarter continues to be pressured by the higher Selic partially offset by the higher results on our own working capital. A significant fact to mention is the NIM increase, both gross and net of credit provisions.

We will now take a look at Slide 8, in which we present the Insurance Group's numbers. Net income improved by 49% in the first half of the year, reflecting an ROE of 19.7%. We emphasize the growth in the revenues which was above 16% over 6 months. This rise is due to the increase in the number of lives covered by health as well as in the number of pension plans and life insurance plans and price adjustments in auto.

Concerning the income from insurance, we saw a better performance mainly related to the improvement of the loss ratio from reduced effects on the pandemic as well as a better financial results for the period. In our projections, up to the end of the year, these lines shall reach our highest growth expectations at least. We continue to see a drop in COVID-related claims. In the second Q '22, these events represented only BRL 348 million, the lowest volume since the beginning of the pandemic.

Let me now turn to Slide 9. Fees jumped at 6.7% year-over-year, reflecting the addition of 4.3 million clients in the last 12 months, totaling 75.5 million clients. The credit card line spiked at 32% in 1 year, reflecting a higher transaction volume in cards, which topped BRL 73.6 billion this quarter. This growth in volume is a consequence of larger clients base, the amortization of the economy and also the effect of inflation on our client spending.

Let's now go to Slide 10. Operating expenses increased by 4.7% in the accumulated 6 months, much lower than the inflation of 10.7% as we saw in IGPM and 11.9% in IPCA in the period. Personnel expenses have risen to the collective bargaining agreements, 11% last year and also investments in our investment advisory technology, analytics and data science teams. As a result of our efficient campaigns, administrative expenses posted a contained growth. Other expenses dipped due to the large volume of provisions that occurred last year and should not be repeated this year.

The efficiency ratio was 42.4%, one of the best in our history. One thing to highlight is the optimization we promoted in our physical presence. We have transformed our branches migrating to a more advisory in less transactional model. As such, since 2018, we have opened 976 business units and reduced 1,691 branches. As part of this transformation, we train our managers with tools that facilitate remote or face-to-face service according to the wishes of our clients. Today, we have nearly 25,000 relationship managers and more than 1,000 investment specialists who promote loan investment, and insurance consulting to our clients. We will be adding 700 investment specialists to this team still this year.

We also need to point out a unique competitive advantage in our strategy that is Bradesco Express, where we complement our fiscal presence with a significant capillarity and convenience to customers through more than 40,000 bank correspondents, it's our asset-light strategy in our branch network.

Now we take a look at Slide 11. Our capital ratio remained at fairly comfortable levels. Property generation has allowed us to maintain a solid distribution to shareholders in the form of interest on shareholders' equity. We experienced an expected reduction of 40 bps in the Tier 1 capital index over the quarter due to the regulation of tax credit treatment originating from the hedge of investments abroad with an impact of 50% in June '22 and the remaining 50% in December '22.

We also saw the impact from mark-to-market of the security portfolio. The additional capital increases by 20 bps with the review of that, that would mature progressively from 2025, taking advantage of favorable market conditions at the moment.

Let's go to take a look at Slide 12. Our digital experience is continuously evolving, represent enhanced autonomy, a better experience for our clients and much more business. 70% of the account holders are at digital. Our total transactions, 98% are carried out via digital channels and financial transactions via mobile and internet grew 57%. This autonomy also drives the accounts opening the Bradesco app.

This half of the year alone, we have nearly topped the total accounts opened through the app in 2021. There are 82% more accounts totaling close to 1.5 million openings from January to June this year. The opening of individual micro entrepreneurs accounts follow this growth with an increase of 79% within the same period.

And as for experience, clients have increasingly sought ease and customization to improve their experience, we give voice to our clients. We listen to what they have to say and develop products and services consistent with their desires, needs and moments in their lives. This allows us to enhance their experiences as we did with revitalization of the peak section within our app.

In addition to positive feedback, this closeness to our clients generates a lot more business opportunities. For individuals, digital origination represents 74% of the volume of transactions. The same effect can be seen in investments. We jumped at 112% and in insurance, which grew 132%. There were also positive results in companies where the amount of press released spiked by 139% and investments by 111%. Consortium also grew by 70%.

Turning now to Page 13. In sustainability, one of our major pillars of corporate strategy, we were the first Brazilian bank to join PCAF Partnership for Carbon Accounting Financials, an international benchmark for calculating the portfolio carbon emissions. In 2021, the carbon emissions from our company's portfolio were 13% lower than the emissions in 2020. And just to give you an idea, 20% of this portfolio comes from customers who have already made some voluntary commitment to decarbonization.

Our strategy was recognized by GFANZ, an alliance that brings together financial institutions around the world with net 0 commitments. We had 2 case highlights as a reference in the financial sector. This recognition reinforces our purpose and performance in favor of sustainable developments. In this sustainable business agenda, we remain committed to the goal of generating business with a positive impact, and by June, we have already reached 52% of the objective. Our strategy and leading role are recognized in the evaluation of the main sustainability index and the ratings all over the world. where we perform above the industry average. We are happy with this recognition and invite you to learn more about our sustainability strategy in our integrated reports.

Now we go to the next slide, where we're going to discuss guidance. In the expanded loan portfolio, we expect to close the year with a movement compatible with the range from 10% to 14%, close to the center, considering a stronger comparative base in the second half of 2022 and adjustments we continue to make in our origination according to the scenario of service.

The performance in client NII continues along at a good pace, benefiting from the increasing spreads, portfolio repricing, shift in the mix and the impact of the higher Selic rate on our deposit margins. We see growth at the top of the range of 18% to 22%. Fee and commission income is expected to continue being favored by the growth in card income and loan operations. Our expectation is the convergence towards the center of the 4% to 8% guidance.

Regarding operating expenses, we continue with our efficiency and control actions that allowed us for a guidance with a range well below inflation even with investments in our digital initiatives and in the technological evolution of our business. We should finish out the year between the center and the top of our operating expenses guidance.

Expectations are positive for our insurance business with a growth trend at the top of the guidance of 18% to 23%. The result may be driven by operational improvements with the evolution in premiums as well as in the financial improvements.

Finally, in credit provisions, we are looking at movement towards the upper part of the guidance, which is BRL 17 million to BRL 21 billion due to the intensification of growth in higher-yield portfolios and the expectation of delinquency levels is slightly higher than the current ones. As for the market NII although we do not have a guidance, we remain with an outlook that proceeds under pressure that we're going to comment as we have already commented before.

Thank you for your time. And now we are going to proceed to the Q&A section.

[Operator]

[Operator Instructions]. The first question comes from Thiago Batista with UBS.

[Thiago Batista, UBS]

I have two questions. The first one about the capital position of Bradesco. The bank ended the first Q -- the second Q with a Tier 1 ratio of 13.3%, if I'm not wrong, more or less in the meet of the bank's indication between 13% and 20%. When you look ahead, do you see any chance to reduce these Tier 1 targets that Bradesco has, if I'm not wrong, 13% to 14%?

And the second question is more a follow-up for the Portuguese call. But in the end of the Portuguese call, Octavio mentioned that NPL ratio would not achieve or not be above the 4% threshold. I want to confirm if this is the bank's expectation for the end of the year? Or if this is more a kind of a peak that we can -- we probably will see in '23. So only to trying to have a little bit of more color of this 4% NPA ratio target or for iteration that the bank should achieve.

[Carlos Firetti, Business Controller & Market Relations Director]

Thiago, in terms of capital. I think we have been operating at a level we think it's very comfortable. I think we have a level of capital that is even slightly above what we see as the internal targets. For the time being, we should continue operating with some comfortable levels of capital, we should keep our dividend policy in line with what we have been doing in the last few years, probably paying interest on capital that will naturally take our pay out to something around 40%. So for the time being, we foresee this will remain as our policy.

In terms of NPLs, what part referred is 4% as a reference, basically, we had -- we don't believe it's going to be above this level by the end of the year. It was more like a reference.

[Leandro Miranda, Managing Executive Director & IR Director]

Yes. Just to add to your sense here, Thiago. Although we expect some small deterioration until the end of the year, as inflation gets controlled and the interest rates is starting to decline, we shall also benefit as far as NPL is concerned.

[Carlos Firetti, Business Controller & Market Relations Director]

Just a complement on capital. This quarter, given the adjustments related to the end of the Central Bank waiver on the treatment tax credit, we had this reduction in capital. That also was caused by the market to markets we have seen given the interest rate movement. We believe that with the monetary policy probably already reaching -- with interest rates reaching the peak we foresee less market to market. So even though there is another round of adjustments related to the end of this waiver, we don't foresee further reductions in capital probably, earnings retention will allow us to more than compensate this event until the end of the year according to our [indiscernible].

[Leandro Miranda, Managing Executive Director & IR Director]

Yes. And it's important to highlight that we shall just have an extra event in December. And from that point on, we're just going to see the capital increasing by accumulated profits. So we believe that we are on a very comfortable position as far as cap is concerned.

[Operator]

The next question comes from Tito Labarta with Goldman Sachs.

[Daer Labarta, Goldman Sachs Group]

A couple of questions also. First, I guess, following up a little bit on the credit quality. Because the NPL ratio went up 30 bps. You sold about $2 billion in loans probably would have gone up another 30 bps. So you would have been at around 3.8%. So you're already above kind of the pre-COVID levels. Just to understand, what gives you comfort that it won't go above that 4% level just given some of the deterioration that we've seen over the last 2 quarters?

And also, combined with that, on the loan growth, I know you mentioned you're going to kind of slow down a bit for the rest of the year, but you're still growing pretty quickly in unsecured credit, right? Like credit cards of 46%, personal loans of 20%. How much one is -- is the growth in those segments impacting the NPL ratio? Like how much of it is just mix? And what gives you comfort also to grow in those segments with the sort of decelerating credit quality? Just to get a sense of how you see that going forward.

[Leandro Miranda, Managing Executive Director & IR Director]

Thank you very much for your question. Well, first of all, the deterioration that we see in credit cards as well as in personal loans, they are pretty much natural and expected. Therefore, what is really important for us to see the net spreads. And the net spread is not only positive, but it's growing. Therefore, this is something that still makes sense for us. Of course, if we do not see a GDP growth, if you do not see unemployment rates decline as well as a mass of salaries growing, this line shall start to get riskier. And if it's -- for any reason, jeopardizes the expectations we have, we are going to reduce the growth.

We do not have a magic number regarding to how much it might increase until year-end, but we do not expect to be dramatically high. And in terms of the 29 bps that you have pointed out, considering an occasional sale of the portfolio in the way we did, this is something that we do every quarter.

And you shall have this effect by the end of the day. And we do that because basically, we believe that either we are selling the portfolio at a much higher price than what we have in our books or because we are going to spend much, much more in terms of cost and time attention from our team in terms of origination. So we just make that whenever it makes sense. Most of it we are talking about individuals portfolio. So we are not in a position that is not controlled or different from what we have done in the last quarters.

And as our CEO has pointed out, we do expect to keep in with this practice because by the end of the day, maximize return and we have a much better use of our time in our teams.

[Carlos Firetti, Business Controller & Market Relations Director]

Yes. Just to complement with a few points. In terms of the growth we have seen in NPLs, we believe it's related to the normalization of the credit conditions we have seen in the beginning of the pandemic, where we had more renegotiations. We had loan extensions and also families accumulating savings. I think the normalization of these conditions answers for part of the increase.

On top of that, we have kind of a mix effect. We were growing in interest until early 2021 in lower-risk credit lines with mortgage leading the growth. And since then, we start to see growth in consumer finance lines comparing, for instance, the mix of loans we have today with the mix we had in 2019. Basically, this change of mix answers for something around 40 bps in terms of increasing the 90 days NPLs. So only by the change in mix in the last 12 months where we had this more strong growth in consumer finance lines.

In terms of loan growth itself, we have this deceleration throughout the year. Part of it is because we had a big growth in the second half of last year and this base of comparison naturally leads to this deceleration. That's why our guidance goes from 10% to 12%. We were already expecting this kind of growth. We have already done some adjustments in our origination and our models, especially on the consumer finance lines. But anyway, we, as Leandro pointed out, we still see opportunities. As you can see in our net interest margin after provisions as Leandro said, we are still growing margins after provisions. And that said, it makes sense to continue originating good quality credits that are profitable.

[Leandro Miranda, Managing Executive Director & IR Director]

Yes. And just opposite to that, our NII grew by 130 bps. So by the end of the day, it was accretive to our results.

[Daer Labarta, Goldman Sachs Group]

Great. And that's helpful. And just to clarify, you said the mix impact was 40 bps over the last 12 months. Is that correct?

[Carlos Firetti, Business Controller & Market Relations Director]

Yes. No, 40 bps comparing year-end 2019 portfolio to now.

[Daer Labarta, Goldman Sachs Group]

2019.

[Carlos Firetti, Business Controller & Market Relations Director]

Yes, year-end 2019 to the current portfolio.

[Leandro Miranda, Managing Executive Director & IR Director]

Yes. Basically, we are just making reference to the change in mix because at that time, with lower interest rates to have longer-term financing such as mortgage, more corporate loans and less short-term financing to individuals and SMEs. So just trying to show you that the increase in the NPL was much, much lower than the net NII that we got.

[Daer Labarta, Goldman Sachs Group]

Yes. Okay. No, that's helpful. And one other follow-up, if I may. Just -- have you tightened your credit standards at all? I mean, I understand you see opportunities and credit spreads are there. But I mean, do you are you tightening a little bit like how much you lend at all? Or are you still kind of comfortable? Has that changed at all?

[Carlos Firetti, Business Controller & Market Relations Director]

Yes, sorry, I...

[Leandro Miranda, Managing Executive Director & IR Director]

Well, basically, our model is pretty much automatic. It sees how much we have in inflation, how much we see we have in interest rates, in unemployment rates, how much is the salaries, earnings of our clients, and it adjusts. So of course, as long as inflation goes on and interest rates remains high, there is less appetite normally from our organization to provide loans to risk in riskier securities to riskier individuals and small companies. So this is something that we keep an eye on an ongoing basis. And for us, it's important to see a growing and positive NII, net NII.

[Operator]

The next question comes from Carlos Gomez with HSBC.

[Carlos Gomez, HSBC]

Two questions. Are you interested in the sale of? And second, on the waiver for capital, is there any other additional waiver that we should know about for the future?

[Carlos Firetti, Business Controller & Market Relations Director]

Sorry, Carlos, regarding the first question, we are not looking at. We do have interest. The second question, can you repeat it Sorry, we lost it.

[Carlos Gomez, HSBC]

Yes. I'm sorry for the background noise. You had this waiver for the capital that has resulted in a total cost of 80 basis points. It's -- we didn't know about it. Is there any other waiver that we should be aware of for the future that could affect your capital positively or negatively?

[Carlos Firetti, Business Controller & Market Relations Director]

No, there isn't anything else. I think this is something that was related to the big volatility we had in the beginning of the pandemic. And we don't have any other extraordinary band like that.

[Leandro Miranda, Managing Executive Director & IR Director]

Just to make a -- two sentence here after Firetti, for any reason, is willing to discuss business with us, we are more than happy to listen to it. We are wide open to business opportunities all the time.

[Operator]

[Operator Instructions]. The next question comes from Thiago Batista with UBS.

[Thiago Batista, UBS]

Just as my follow-up about the credits that you saw, the BRL 2 billion. Do you have the profile of these loans is more retail or any type of retail loans let's say, consumer and credit card, do you have any color that you can share with us?

[Leandro Miranda, Managing Executive Director & IR Director]

Yes. Most of it was retail, consumer and credit cards.

[Octavio de Lazari, CEO]

And also loans in these categories that were renegotiated previously renegotiated sometimes second renegotiation.

[Operator]

Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for the closing remarks.

[Leandro Miranda, Managing Executive Director & IR Director]

Well, thank you all for making the time to be with us. We are going to be more than happy to address any questions you may have from now on. Our Investor Relations team is ready to answer you by e-mail, phone calls, whatever is easier for you. And with that, I would like to wish you a very nice weekend. Goodbye.

[Operator]

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