Banco Bradesco SA
BOVESPA:BBDC4
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Banco Bradesco SA
Earnings Call Analysis
Q2-2024 Analysis
Banco Bradesco SA
In the second quarter of 2024, Bradesco Bank reported impressive financial performance with a net income of BRL 4.7 billion, marking a 12% increase from the first quarter. The bank's return on investment (ROI) metrics were particularly strong, reflecting robust profitability and safe growth. This growth was driven by the bank's diverse loan portfolio, with notable increases in key areas such as wholesale banking, SMEs, MSMEs, and individual loans.
The bank's loan portfolio surpassed BRL 912 billion, experiencing a quarter-on-quarter growth. Among the standout segments, MSMEs showed a substantial growth of 10.12%, while individual loans grew by 5.7%. The expansion was not only balanced across various segments but also maintained a healthy mix of low-risk, high-quality loans, including payroll deductible loans and real estate loans. Bradesco’s disciplined approach ensured a stable client Net Interest Income (NII) and minimized delinquency risks.
Bradesco's operating expenses grew in line with projections, showing strong discipline in cost management. The bank's revisit of its operational footprint allowed it to expand efficiently, adding 1.8 million new clients, primarily from payroll loans and checking account holders. Personnel and administrative expenses saw moderate growth of 4.3% year-over-year, demonstrating controlled expenditure amid expansion.
The insurance segment remained robust, contributing significantly to the bank’s overall performance. The segment reported a net income of BRL 2.2 billion, growing 12.7% quarter-on-quarter with a return on equity (ROE) of 22%. This growth was attributed to strong commercial traction and competitive product offerings, underscoring Bradesco’s capability to maintain momentum in diverse operational areas.
Bradesco improved its future outlook and raised guidance expectations, aiming to deliver a stronger performance in the second half of 2024. The bank highlighted plans to accelerate revenue growth through strategic measures, including expanding client preapproval for loans, better client fund management, and leveraging digital channels. The guidance indicates an anticipated net income range of BRL 17.5 billion to BRL 18.5 billion for the year.
The bank underscored its commitment to technological innovation, mentioning the launch of new platforms and the use of machine learning and data analytics for better credit models and risk management. These efforts are part of a broader transformation project aimed at enhancing operational efficiency, customer experience, and overall financial performance through cutting-edge technology and strategic investments.
Looking ahead, Bradesco is poised to continue its path of sustainable growth. The bank's focus on maintaining a balanced loan portfolio, disciplined expense management, and leveraging technological advancements will underpin its efforts to deliver consistent returns to shareholders. Ongoing initiatives to improve client experience and expand market reach reflect Bradesco's strategic emphasis on long-term financial health and stability.
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Good morning, ladies and gentlemen. I am Marcelo Noronha. I'm here speaking from Cidade De Deus, the headquarter of Bradesco Bank for the presentation of the results on the second quarter of 2024. Now the time is 10:31 a.m. and it's a pleasure for me to be with you again this morning in this beautiful sunny morning in the town of Osasco in Sao Paulo.
And we are here to talk about our results for the second quarter, which hit BRL 4.7 billion of net income, growing 12% quarter-on-quarter, meaning that the second vis-a-vis the first quarter of the year with this ROI that you see here on the screen. And here, we have 6 topics that summarized our net income or summarized what happened in the second quarter of 2024. It could also be the summary and the conclusions that will lead us straight into our Q&A.
First of all, we had a solid and safe profitability growth. And here, I'm referring to our loan portfolio and the mix that I am about to show you in a moment. We also posted an evolution of net NII driven by client NII quarter-on-quarter and also the reduction in control of loan loss provision expenses. We increased the expanded portfolio in all segments, including in the wholesale bank with emphasis on SME and MSME and individuals. But please note that we are not growing above market rates, we are growing in line with the market. We had an improvement in NPL in all segments and also we posted growth in the coverage ratio.
Operating expenses are growing in line with our expectations. And naturally, with a lot of discipline, we were able to accelerate our footprint as we've been saying to you before. And finally, we were able to maintain the solid performance in the insurance segment. And further on, I will give you more details about every one of these topics. Our loan portfolio went beyond BRL 912 billion with a quarter-on-quarter growth. But I would like to draw your attention to an increase of about 5% of the wholesale bank and moreover MSMEs with a growth of 10.12% and individuals also growing 5.7%. In the case of the MSME, I would like to remind you that here, we have middle market segments and also SMEs market.
And moving on, look at the loan portfolio and the mix with similar growth in individuals, 2.5% and 2.5% in companies. I'm speaking about quarter-on-quarter. But this snapshot gives you an idea of our mix. First, the first conclusion is that we grew all lines. Secondly, we grew with a very balanced in the mix with insurers' good NPL levels through time. Constant speed, but not spikes with client NII, because here, we have payroll deductible loans, real estate loans. These are all very important portfolios for us in rural loans on the individual side, which allows us to have a good balance of our mix with low credit risk.
Now maybe the card segment, it didn't grow as much, is something that I will talk about later on. In terms of companies, look at SMEs or MSMEs, growing 7.2% quarter-on-quarter. And again, here, we had good growth in foreign trade, real estate and working capital. But there was also a very satisfactory growth on the company segment. And I'm talking about SMEs and large corporate with a very good level of guarantees, which is higher than what we experienced in previous quarters. This also ensures good balance for us in the next coming quarters.
And this also demonstrates, and if you allow me to give a step back, this demonstrates our capacity of attraction or commercial attraction. Every day, we deploy new models. We are improving our portfolio management with all of that business unit segment that we put together for the loan portfolio. I mean traction is also important, I could have all the limits available. But look at the penetration level that we have in all segments. And soon I will talk about fee income recurring revenue. Here, I have 2 charts that we also presented last quarter. And here, I'm talking about vintages. Over 30, but I'm referring to vintages that presented the best correlation of losses in every vintage, 4 months after credit was granted, what is overdue more than 90 days. This dotted line which is the 100 basis the average of approvals of 2019. That means prior to the pandemic. And here is the line that we use as our own reference.
So in the mass individuals, we have controlled vintages between 60% and 65% of everything that we approved back in 2019. But we've been gaining traction. Look at the first quarter and then second quarter in the gray bar, how much we evolved even with that same level of vintages over 30 days, 4 months. And the idea here is that this could be slightly higher, so that we will strike the optimum return level in terms of loans.
I can take a little bit more risk here. And then this will give me a very good return in terms of NII and delinquency is well-behaved going forward. And then I can give you more information about our origination. We are growing in line with the market. We are growing with a good level of solidity and security. Accounts opening, the reference is again back in 2019.
In terms of growth, in the first quarter, SME, and I am talking about mass companies. It was more traction in this quarter. But the level is between 60% and 65% of what we used to present in the vintages of 2019. This inflection of the curve is the baseline, because it was very low here. It means that the approval rate was very low. We were capturing lower vintages with lower origination. But here we are at the same level of individuals with a drop in delinquency in the next chart, as you can see.
Now moving on, here, I bring this slide to show you probably 3 things. First of all, how come we were able to deliver a total of released loans in the second quarter of 2024 of BRL 84 billion, BRL 34 billion being through digital channels? And why is it that we believe that we will continue to perform as such in the third and fourth quarters as well? With all of these new modeling systems and the intensive use of machine learning, increase in personnel, process improvement and everything else we did, even considering credit card management, not only in terms of middle marketing, but also SMEs of [ BRL 3 million to BRL 50 million ], I think. There was a change in preapproved when compared to the second quarter of 2023. Starting with a base of 100, that was an increase of 20%.
But if we look at the volume, there was a growth of 27% in this sense. What does that mean? It means that with the commercial traction that we have in every segment, including in digital channels. Naturally, we are delivering a client NII that is growing, stable based on that mix that I showed before. But not only based on credit, because that's the main leverage but also based on liabilities, because in 2024, we noticed growth of our receivables from clients. But the cost was slightly lower when compared to the same period of 2023.
But the third piece of information I have here for you is the evolution of the approval rate. This reinstates what I said before and I'll be careful with credit risk, mix, adequate pricing, models that are much more adequate using transactional data, use of machine learning, better ratings, particularly in the individual segment.
When we talked about the 2019 vintages ratings ranging between AA and B, we were bringing 61% of approvals. But today, the same vintages are bringing between 74% and 75% of approval rates with ratings between AA and B. But note that if you look back to June 2023, where you see this red curve. It was in the low range of our approvals. Our approvals increased on average in June of this year when compared to June of last year. They grew 25.7%, meaning that 16% -- that was 16% lower than all of the approvals back in 2019, even with that traction and the growth that I showed before.
But also notice that in order to achieve 25.7% in individuals, we grew almost 27%. And small companies, the approval level is lower, is more conservative. And we are very much with our foot on the ground. Therefore, we are very comfortable and very reassured in terms of what we've been doing with our credit selection and our growth growing step by step, but moving forward in terms of our credit risk.
And so, naturally, we go to our NII, which grew 2.8% quarter-on-quarter, reaching BRL 15.6 billion natural, market NII, given the volatility noticed in the past periods was slightly lower, but we believe that it will grow. But now client NII stood at BRL 15.3 billion, growing 5% quarter-on-quarter. And the net interest income in the first quarter of 2024 went to BRL 15.3 billion in the second quarter, but notice that, in the meantime, if we look at our NII, we grew substantially and this growth mainly came from our loan growth. But everything was balanced, less margin, payroll loans and there were other lines that also helped to make up that mix and also in the corporate segment with that net spread.
But look at the NII growth, quarter-on-quarter, we grew 18.7%. And this is what moves the needle in our bottom line and this is what we have in terms of client NII. Our delinquency curve is coming down, NPL creation well under control, in line with the previous quarter, very close to 100%, but the coverage ratio over 90 reached 170.
Now moving on, in terms of our expenses with loan loss provision, we reached BRL 7.3 billion, mainly attributed to these 2 reasons. We had improvements of the vintages quality and higher efficiency in terms of collection and credit recovery. And this explains and justifies our loan loss provisions.
And then we come to another area and this has to do with having the business areas well traction. And I'm referring to fee and commissions revenue that helps our top line. And if you look at it, they grow almost in all the lines with highlights to credit operations, 3.5% quarter-on-quarter. And again, this is due to our commercial traction, to the level of relationship that we have with our client base at different levels. So we also grow in current accounts, 3.1%. And I draw your attention to asset management. We grew quarter-on-quarter 6.4%. And AUM grew to BRL 33 billion when you compare the second quarter '24 versus the first quarter of '24.
And then, I draw your attention again to the card income. You saw that our loan portfolio was not growing that much. But we are more conservative in terms of the low-income client. And obviously, with those that are non-account holder. In terms of capital market, we grew 12% almost year-on-year. So with our pricing risk is lower and capital market is also grew substantially. It's not absolutely regular, but the growth was quite high.
And talking about operating expenses, I'd like to draw your attention to our revisiting of the footprint. We've been doing this very carefully. We're very, disciplined. And you can see a client base, again, has commercial traction, growing 1.8 million clients and most of them coming from payroll loans, INSS, public payroll loans, private payroll loans. And the part of this comes from checking account holders that also grew in the last quarter.
And we point to our indicator in the guidance first half '24 compared to first half '23, up 7.6%. And here, I bring you reconciliation on some points. Personnel and administrative expenses growing 4.3% or 4.5% first half '24 over first half '23 and this was because of the care and discipline that we've been having in terms of growing our personnel and administrative expenses.
If we look at the complete income statement, you will see other expenses that do have an impact on this indicator. This is 4.5% and representing 7.6%, but I bring you an interesting reconciliation just for your assessment. We or shareholders and for all of the companies under Elopar or Livelo, Alelo, [indiscernible] and Cielo, and what we have seen in these companies. For example, Cielo has been doing a lot of transformational work but they are also investing to grow, to develop their business and the same goes for Alelo. And in these 3 cases, when we consolidate, we see a 2-digit growth in operating expenses.
If we were to normalize this level of growth because it will normalize eventually, our indicator would not be 7.6%, but rather 6.2%. As a result of this consolidation which is positive for the growth of these companies, so this is just a reconciliation to show that our expenses are well under control in the quarter.
And then we move to the insurance group, another very strong quarter, net income of BRL 2.2 billion, 12.7% growth quarter-on-quarter, 22% ROE in this level of revenue of premiums contribution savings bonds with this level of growth. And why is this happening? Why is this growth happening, because of commercial traction, competitive products and services, both in the bank and in the insurance group? This is what explains this growth.
There is a phenomenon we'll see in relation to the guidance is that in the second quarter of 2023, the result of the insurance operations net income in our guidance was BRL 4.8 billion in this quarter, BRL 4.6 billion. But we are taking strides towards Q3 and Q4 to be well within the guidance regarding the results and operations of the insurance group. This is our expectation as well as the expectations of the insurance group, technical provisions of BRL 382 billion growing 2.6% quarter-on-quarter.
Our capital remained practically table 10 bps. If we didn't have mark-to-market, given the volatility we've seen in recent quarters, we would have 0.24% of capital would have grown even with we growing our loan book.
And I'll end the figures part with the guidance; so outlook at implicit net income that we decided to deliver, which is a combination of all of these lines. And if you do the math, our colleagues on the sell side, you will see that we are delivering an implicit potential net income, which is superior to the middle of the guidance. So we have here some supplementary information, which is net interest income minus expanded loan loss provision. That will give us an implicit an annual indicator with that range to facilitate reevaluation.
In other words, we continue to pursue each one of the indicators. That's our objective. It's not a gift that we wrapped in January 1 and opened the gift in December 31. No, we continue to pursue these indicators. We believe that they will grow. In the NII, you could see that we are growing client NII quarter-after-quarter.
And I draw your attention to the month of June when we grew a little more than the market, but in line with the market. And you could see the trial balance sheets disclosed by the Central Bank. It did your evaluations then we have July. So it's easier for you to see and to realize that this level of growth and everything we've done in May and June will have benefits in the third quarter, which is what we are living now. We don't capture all the value in Q2. And the growth that we show in Q3 will be actually seen in Q4.
And speaking about our transformation project, we have been working with a lot of discipline. Cassiano is CDO and he has the transformation office. They have been working. And he has been controlling the team positively checking the time line and the deliveries.
And we detailed all of the execution here. And everything is underway. The people have been working strongly and reading a lot of things. But we delivered a variable compensation plan for the second half, which is more meritocratic. And it fits the expectations of our shareholders. And we had accelerated progress in the credit business unit, as I mentioned, with the right pricing, better processes, better collection performance, better portfolio management with this portfolio management, be you bringing people from the market and the implementation of models with a much more intense use of machine learning, transactional data.
And all of that leads, as I mentioned before, to better ratings in our loans for individuals and for companies and for SMEs. Our expectation for the second half is that we will start our new affluent segment, continued expansion of SMEs. And in the case of Bradesco Expresso, I'd like to stress what I already mentioned in the prior call. We have 2 important platforms in Bradesco Expresso. One to which we relate with our banking correspondents at the checkout. And they offer a much better experience when we started that delivery in December and January. And we started rolling it out to the whole base. This rollout will be completed now in October.
And it is very, very important for our strategy in the mass market clients. And on the other side, we have the other platform to capture transactions. That is done by a network. Now, we are concluding the rollout before for capturing networks. And when this is completely done, what we'll have is, number one, a reduction of operating cost Bradesco Expresso for their transactions and that's the first consequence.
The second consequence, we'll be in a position to have new investments for the capturing network as well as for this new platform that relates with the checkout of the banking correspondents. All of this will be done much more easily in a much more friendly environment for those frontline people. I went out in the field. I did visit some small merchants in the countryside of Sao Paulo to see their experience and had excellent feedback from the correspondent, from some correspondents that have been our correspondent since 2005.
And the third gain that consequence is the experience, of the commercial banking correspondent and of the individual clients who has served through that channel. And also for SMEs, the SMEs platform also is part of this, and it involves Cielo.
And I move to my final slide, for the conclusions and the summary of everything I've said so far. Number one, step-by-step, solid and safe profitability growth; I spoke about the mix. I spoke about pricing and above the model. We have revenues growing with a positive inflection of the client NII as well as fee and commission income, the insurance group, everything influencing positively our result, focused on that.
NII, with a focus on risk-adjusted return, I showed the slide with the levers that proved everything we delivered in loan BRL 84 billion approved in the increase in the NII, client NII as a result of everything we are doing. And we expect to have better deliveries in Q3 and Q4. Firm plan execution at an accelerated pace of our transformation. And lastly, enhanced the client centricity within a way to serve new product formats that will fit different client segments, different than what we did in the past with other structures, other configurations. And we'll deliver a new app to our clients with a new experience for them as well.
We also deliver much greater use of Gen-AI to help our BIA to interact not only with our employees in the several segments but also with our clients. So I spoke about the insurance group as well with a great combined ratio below 90%, when we had achieved 90% in recent periods, which is an excellent indicator for the sector.
And lastly, I'd like to bring you one more piece of information, some news, which is the hiring of a new officer for our organization, somebody who will be working with our technology team. This man has a vast experience abroad, vast experience in transformation projects. His experience will be added to [indiscernible] team with [indiscernible] and Cintia and our other colleagues who make up the technology department, but linking more and more technology to the business, to the product's department to clients. He will be joining us most likely by the end of August. That's the expectation. Everything is arranged. And this officer will be bringing great experience in other transformation projects to add to our efforts.
So I'll end my presentation here. I'd like to thank you for your attention. And I have my colleague, Andre Carvalho, our IRO and Cassiano Scarpelli who heads the financial department. He's our CFO and he's also our CTO. And we are available to answer your questions. Thank you very much. Andre, over to you.
Thank you, Cassiano. Thank you, Marcelo. It's a pleasure to be here with you. The CEO of our insurance group is participating remotely. And let us begin the Q&A session.
[Operator Instructions] First question from Renato Meloni with Autonomous.
My question is about the guidance. In this quarter, you added an additional information to the guidance with a much lower expectation of market NII. But the guidance was reinforced. So I understand that the client NII will be low and provisions will probably be lower. So I'd like to understand, perhaps you can explain whether this can from a greater growth of client NII or lower provisions. And I'd like to understand actually what changed compared to the beginning of the year when you prepared the guidance, when you had a higher market NII expectation?
I'll start and then my colleagues can add. My first answer to you is we improved our expectations in the outlook, considering what we had in mind when we prepared the guidance. So we're able to deliver more now. You just have to check the expectation of implicit net interest income in the guidance. And you'll see that we have a higher number.
And the market NII is expected to be better for Q2, stronger than Q2. And quarter-after-quarter, we'll continue to increase our growth NII and our client NII. But we cannot separate the provision costs from the growth of NII. They move together. When we have a better mix with the right pricing, adequate modeling and models, we are bringing growing results with safety, Renato. This is how we see this. This is my expectation. And Andre and Cassiano, you can add anything.
Well, Renato, I just would like to add to what Marcelo said. I'd like to remind you that in the guidance, as Marcelo mentioned during the presentation, we have the implicit net income. That's our reference. And we started adding something more to show how we are looking at our NIM, the specific guidance. How we set out the ranges, which we believe are fundamental to get to this implicit profit.
And the traditional guidance, by the way, is annual. So the lines will fluctuate. But it is just a north for us, an incentive for us. We want everyone to focus on the initial guidance, because it is very tangible. It is very strong so that our people can work with a lot of dedication. And more than that, we cannot forget that the lines have values that will complement the market NII. It can come from the client NII. It can come from very controlled expenses or in fee and commission income. So we're confident in the implicit profit. It's a base and we'll try to deliver more.
And just to add, this time, we added a slide to the presentation, which is the slide of the levers. In other words, we present to you measures that have been adopted to accelerate our revenues. Our revenues don't grow in a linear fashion. They will expand more in the second half compared to the first half. And Marcelo spoke about a number of clients who are preapproved, offering of loans to these clients, increased approval ratio, better management of the client funds.
In other words, a number of measures that should help us accelerate revenues and margins in the second half. It's a game we're playing. It is a challenging one for sure, but we continue to pursue the goal. That's my point.
Moving on to the next question from Eduardo Rosman from BTG.
Congratulations on the results. I have 2 questions. The first is about your risk appetite. I think the financial conditions of the country and even abroad got worse. I just want to understand how this could eventually change the bank's risk appetite for the next quarters? And my second question is about the recently announced change in variable remuneration. Does that contemplate anything like short term or midterm? I know that you are in the midst of an important transition. I just want to understand whether you're contemplating anything for next year.
Rosman, I would say that our risk appetite is moderate because we have our feet on the ground. You might recall that I showed a chart of the approval rate. In 2016, it was 60% -- now its 16% lower than what we used to approve in the past. In terms of individuals, when we compare today to June of last year vis-a-vis June of this year, but in SMEs, that's still lower, 17% against 27%.
And if you look back, remember what I said about mix and pricing. So we have models, mix, pricing and obviously this composition of risk appetite with a much more severe portfolio management based on SME. Meaning that we are much more comfortable in terms of what we are doing. But we still -- in keeping with the market. We are not exceeding the level of growth. But we have a lower appetite in terms of SMEs.
But as we are monitoring that very closely every single day, maybe tomorrow with a change in the macro landscape, we may adjust our appetite for risk. So we are growing with quality and a good level of security and solidity and the new variable remuneration that I could not summarized that in only 2 minutes, but I'll try to give you an overall picture.
If I take, for instance, the wholesale bank, the managers, they were already measured on what they generate in their portfolios based on some indicators. But the leadership group was less linked in terms of the weighted average to the unit itself. But they were more linked to the bank's general business. And the bank's general business remains an important trigger because we have to meet shareholders' expectations.
But it's important to look at the leadership group and one of our colleagues that the remuneration is a bit higher because they have to take care of a lot of people. So this applies to operating efficiency and areas related to this transformation. So things were done in such a way that is based on merit. So if Andre delivers more, I have to compensate him better when compare to another colleague that has a good profile, a good track record with the company, but he didn't deliver as well. So his compensation is not the same as Andre's compensation.
But we look at the different business units and we look at individual performance, but mostly based on what is under that individual's wing of responsibility. And the new variable compensation is already being applied in the second half of the year.
Now the next question comes from Thiago Batista from UBS.
Congratulations on your results. I have 2 questions. The first, Noronha, when he presented the strategic plan a few quarters ago, he said that the bank expected to have returns very close to the cost of capital at some point in 2025. When we look at Bradesco's results this quarter, is it possible to say that the rebound of the bank is occurring faster than you anticipated or maybe not or maybe are we in line with the capital or the estimate for 2025?
And the second question is about the insurance company. What was the impact of the events in Rio Grande do Sul? How does that affected the bank's results or r there is still something to be recognized going forward.
Well, Thiago, sorry. I said Rosman, Rosman was the previous question. Thiago, this ROE close to capital in 2025, as you mentioned. I think the dates may change. I mean we are not promising to deliver ROE close to capital with a very specific view. But I think we are talking about 2026. But now what I can tell you goes in line with what you said. Well, we are moving faster. Yes, we are faster than what we previously anticipated. That's why when I talked about the guidance and the net income, we were above the guidance. So I think that we can deliver something in addition to what was implicit in our net income in the combination of all KPIs.
But in terms of your second question, all of the potential impacts for the insurance business that is much more related to the auto segment has been already absorbed in this half year. And in terms of the solidarity with our clients and people in Rio Grande do Sul, not only with the bank, we made -- there were several actions by the insurance company paid for all the claims and everything has already been contemplated in the results of the bank which was good. So we don't anticipate any impact going forward. The impact was fully provisioned in our results line. Thank you for your questions. Any more comments?
Ivan is here. Ivan, do you have any additional comment? Please.
Marcelo, and thank you, Andre. It's just important to give a little bit more visibility to Thiago that the amount was BRL 165 million gross, a BRL 100 million net, that was the impact to the insurance business. And we do not believe that this will be carried over in the next quarter. So there will be no further effect in our P&L. And also, you talked about our -- the insurance assistance when we aided our insurance holders and those that were not insurance holders. So the impacts have been already contemplated in the P&L of the second half. And now we just have to look at the second half in a more objective and clear way with all our objectives in line.
Our next question from Bernardo Guttmann with XP.
Congratulations on the performance this quarter. After the important de-risking work and work to improve the quality of credit and now resuming origination of individuals' loans, and I imagine that this growth should be a combination of different segments in addition to the mass market. The bank historically also had this DNA strong exposure to low income. It would be interesting if you could elaborate on how you're advancing to the top of the pyramid? The market seems a lot more competitive with some well-established players. Perhaps you could speak about the different digital platforms and the other initiatives in financial advisory, which you are pursuing to improve your mix and positioning in the individual segment?
You actually mentioned some important conclusions. It is true what you said. You will remember an indicator showed of credit cards. We are not growing that portfolio a lot. There's a variation in terms of service provision there and fee, and commission income. It's low. But we grew a lot more in the high-income portfolio. We grew 12% year-on-year. So what you said is true, we have substantial growth in mid income, in high income as well as in lower risk products, which are also originated by Digio and by Bradesco Expresso, such as payrolls and once I spoke about the 4 lines, INSS, public, private, payroll loans and FGTS. Payroll loans. So we are growing in all of these audiences and with it a lot more care when it comes to low income and non-checking account holders, when we used to have every current credit card growth. So we are growing quite well in high income. And we are growing now with the adequate lower risk segments.
Next question from Brian Flores with Citibank.
Noronha, you mentioned something interesting. We are kind of doing the math here. Sometimes we tend to focus a lot on assets. But in liabilities, we can see that the cost of deposits is improving as a percentage of CDI. So my question is, what are the measures you're taking there? Could you perhaps give us more color on the competitive landscape in this segment? And what should be the trend looking forward?
Cassiano?
It's a pleasure to see you. What we have adopted some measures focused mainly on our commercial action. We have been doing important work in the part of middle market with our cash and the commercial evolution that's an important piece of data. And also, our CRM and all of the work that we are doing in terms of working with the database, our data scientists have helped us a lot in terms of low- and mid-income clients, deposit savings that grew again this quarter together with the time deposits, where we have a CDB that remunerates the balance of our general clients.
So these 3 components, better optimization of costs and long-term funding costs for companies that gave us a much better balance in terms of our cash and liquidity, and that brought very interesting gains in our cost of funding. So this principality, this commercial action that Marcelo, so well spoke about in the presentation to be focused on the client close to the clients. It's not just the physical contact face-to-face. It's also the app contact. As Marcelo mentioned, we now have a new app, a new functionality, a new concept. So this concept of presenting proposals presenting opportunities. This has brought us great results.
And in terms of investments, the specialists that Marcelo spoke about, it's not just cash. It's also the assets part that is evolving a lot this quarter. So this is the components. We are focused on the assets line item, yes, but the liabilities line item is also important for our comeback story and profitability. Brian?
Let me just add to this. We're talking about growing NII -- client NII?
And NIM. We're talking about growth and fee and commission income growing and also controlling liabilities, that's the result of commercial activity, mobilization capacity and penetration that we have in our client base of different segments. We're talking about high income, retail bank, wholesale bank, mass market, SMEs and so on and so forth.
Next question from Daniel Vaz from Safra Bank.
Andre, Marcelo and Cassiano, congratulations on the results. I would like to refer to change the bank. Whether -- I mean, I know you accelerated the footprint, 411 movements this quarter. And even then, we see the client line growing and the individuals' segment is growing. So can you tell me about this migration of clients, pains and learnings? What is your actual pace? Would you like to accelerate the pace or maybe step on the brake a little? Just let me know, a little bit about the way you were serving clients today?
Well, thank you for your question. It's just natural. The main concern of the bank is with our client base. All the compensations that you can offer comparing -- talking about this pre-transformation or transferring them to another unit or a digital unit. We're doing that very carefully. But with great discipline, we were able to deliver more than what we expected to see for this period. So as we are being successful in this evolution, we will continue to move in that pace. But we will increasingly use intelligence, dedicated teams, proper studies in order to minimize any impact to our client base.
That's why I mentioned the number of -- the numbers related to the base growth, part of it comes from current accounts too. But so we are focusing on growing without losing quality, but at the same time, we want to increase our operating efficiency. That also goes through Bradesco Expresso, something I mentioned during my presentation. I don't know whether Andre or Cassiano have anything else to add. I think you said it all. I believe that the experience that we were able translate in that change of the bank, translates what we did. That's an important learning. You ask about our lessons learned. If we translate our desire to be a lateral bank, this has been translated into all of these good news.
And client principality, client is at the core of everything you do, all of the movements we did in a very assertive way, we did that preserving that principality. So we want to increase credit to use more of our digital for 66% of our account holders use digital channels. So the experience with -- of our app has been very good. And the main lesson learned comes from the entire leadership of the bank. The entire bank understands the need and the capacity we have to do more, and this is a very important commercial activity. And so, in summary, this depicts the movement that right now is very strong, and we can certainly do the same thing at the same speed next half year and next year.
The other aspect is that the service point of the future will not necessarily be like the one we have today, 122 points that we inaugurated. We are removing from the traditional branch, the people that serve companies with earnings up to BRL 50 million. And now they are much more focused and they work with a more agile operating system with credit experts that sit with companies and help them make more efficient decisions. So we transformed that service point into something more objective and with higher productivity.
Next question from Yuri Fernandes from JPMorgan. Yuri?
Congrats on your results. My question is related to margins. The spread itself. Client NII, there was an inflection in about 10 bps. I think everybody was expecting that. My question relates to the speed of it. You talked about SMEs. But my question is whether this SME mix is the mix from very small SMEs? I mean, they were rural, working capital was weak. So my question about spread, you think that you would go back to that 9.7% or 10% that you had in the past? But at what speed your margin will be resumed? And whether the mix of that SME improvement will be good enough to help you accelerate your return?
And the second question is about more structural cost of risk when compared to your historical numbers. You said that everything is improving, the vintages are improving, but cost of credit is still much higher. I mean, there were some things in terms of impairment reversal when you look at the overall picture. But my question is when you look back, do you think that Bradesco could resume the cost of risk that you had in the past or not or maybe things are different? I mean, you will focus more on high income. Looking ahead, the next 2, 3 years, what do you see in terms of cost of credit? And again, congratulations on the results.
Well, I'll start with my initial manifesto with the loss of JP of -- the death of the Head of JPMorgan. My condolences go to his family and to all of the people at JPMorgan with Darahem's recent loss. In terms of cost of credit, this is our expectation. Go back to the previous numbers in a time line. Obviously, this will have to mind the mix. Given the mix in another mix, this is fit into what we saw in the past.
Now as for spreads and growth curve, this also follows the risk appetite and the mix that we capture because if we expand the capture of payroll loan, I mean, those 4 lines because when I refer to the payroll loan, there are 4 lines. And certainly, you go back to a higher spread, but we want to have a mix with a higher remuneration. And that is in line with what you said, but with no very specific guidance to get there, but in fact, delivering better results in the combination of the many lines that we have here. So this is what we expect to see. And now my colleagues can add to what I said if they want.
Yuri, I just have an additional comment. Our cost of credit in the second half was 3.2%, which is very close to what it was in the past. Meaning that the main ROE driver this year comes from this reduction in the cost of credit. But going forward, maybe the main ROE driver will be more towards revenues.
Next question from Tito Labarta.
Two questions also, if you can. First, on fees. In the quarter, fees were fairly healthy this quarter, particularly loan fees and asset management fees, but also capital market fees jumped quite a bit. Just how do you think about the sustainability of this and the belief to earlier fee income, particularly? I guess, on anything there to highlight that may have been extraordinary or difficult to sustain for the rest of the year?
And then a second question on expenses. Operating, I guess, personnel and admin holding up pretty much roughly in line with inflation, but a big jump in the other, particularly within the other line, if you can just give some more color on that? And what drove the increase there on those other expenses?
The fees that you mentioned Tito, had a good performance, like I said during the presentation. We have been delivering this result in a sustainable way. It's recurring. I actually used this word in terms of fees and commissions income. The one that grew the least was credit cards payments. Of course, a couple of markets, for example, and you know how the equity market is behaving, it's kind of slow and this is an important item for the capital markets. And of course, there is an oscillation, a fluctuation, greater fluctuation coming from IB global market that make up the market capital line. It depends a lot on the number of transactions and capital inflows and outflows. So there was a more significant variation.
But regarding the other revenues, we are growing quite well and in a recurring fashion. This is our expectation to continue to grow fee and commissions income better than in prior periods. Regarding personnel expenses, I'll ask our CFO, Cassiano to answer.
As regards to personnel and administrative expenses, as Marcelo mentioned, we have strong control about 4.5% decrease. And it's a totally different period because that takes into account the Collective Bargaining Agreement of 2023 now in 2024. So we are very much focused on controlling expenses. The main difference comes from the other revenues, operating revenues and expenses. We had a baseline deviation in the last year. We had some reversals, gains of some specific claims that caused the reversal in the past. So the baseline this year, it's kind of a difficult comparison for this indicator.
And Marcelo mentioned something important that I would like to stress here. When we look at the 7.3 indicator consolidated for Bradesco, and when we exclude the companies of Elopar and Cielo, we get to 6.2% within our guidance. We continue to be very focused on that considering the whole transformation that is happening.
And also in terms of personnel, we're still hiring people. We are hiring people for the technology department. We're hiring for credit, for investments and for loan products, and we're hiring a lot of data scientists. Still, we were able to balance the result with the adjustment of our footprint. So I think that expenses are under control, and they should bring us a positive bottom line for us.
Next question from Mario Pierry with Bank of America.
Congratulations on the results. A number of positive trends this quarter. I would like to focus more in the long-term. When I look at your efficiency ratio that is improving, it's still very high, close to 52%. So Noronha, when you mentioned your strategic plan for the next 5 years. You never mentioned numbers. So I'd like you to focus on this. How would you see the evolution of the efficiency ratio? And where do you want to be in 5 years regarding this ratio?
My second question is a brief one. I'd like to understand the impact of the BRL depreciation in the growth of credit this quarter?
And actually, I mentioned the number expected for the next period until 2028, and Cassiano was kind of answering regarding the expenses. So I'll ask Cassiano to more directly answer your question.
Mario, our operating efficiency ratio is exactly where we want it to be. It has an initial increase, which is natural given the investments and the transformation expenses. Although, we are controlling the personnel line. So it has a high curve. And as Marcelo mentioned, at the end of the project, we wanted to be close to 40%, that's our target, more towards the end of 2027, '28. We understand that in the second half of 2025 and the year of 2026, we will be able to improve the efficiency ratio, bringing it down. The most important thing is that we are in this ascending curve, which was defined, designed, studied and ratified. And then it will start descending in 2025 or 2026. So we'll land at around 40% by 2028. So we are very pleased because we are following the plan that we have in the transformation project.
Thank you, Cassiano. But you see, Mario, when he says he's pleased, he's momentarily pleased. We are never pleased with a 52% operating ratio. I want to stress that we will pursue this indicator, which is, again, not now. It will not be at the end. It will be in the process. And as regards of foreign exchange variation, well, he basically heads the wholesale portfolio. We didn't have anything relevant in the micro, small and mid-sized enterprises and the individuals portfolio. But to remind you that we produced a lot in trade finance during this period. So the variation is not just based on what we are carrying, but based on what we originated. And setting aside the wholesale portfolio, looking at SMEs and micro companies and the individuals, I think we're doing quite well. So I just wanted to point that out.
Next question from Pedro Leduc from Itau BBA.
Congratulations on the results. I just have a quick follow-up in terms of client NII. There was a very nice growth in the quarter. But you talked a lot about the mix. We see also a lot of spread. And looking at the rates at the end, it's hard to identify that spreads were going up, which led us to understand that there was a component of funding mix that was quite relevant. Can you please help us understand what led you to that 246 basis points of spread increase, so that will allow us to see where the adjustment is so we can make calibrations for the second quarter?
My second question is about health insurance. We see increase in technical provisions. And whether that could be like a pent-up profit for the second half? Because I know that you are becoming more strict with the providers.
So let's start with the second question. I will also like to ask Ivan to join us. Ivan, would you like to comment on the second question?
Marcelo, yes. Growth reflects, Pedro. The growth of our portfolio, efficiency and the financial discipline of our health care companies. They reflect the good moment that we are experiencing in the post pandemic period. So that the increase in number of clients and a perspective view in terms of giving a higher degree of comfort to our clients is what allowed us to...
I think the connection is poor and the image was frozen. So Ivan will come back soon to finish answering the question, but Andre, maybe you can answer the first question.
Client NII. That's a very good point you mentioned. Client NII involves 3 main drivers. #1, portfolio growth. Portfolio growth brings increased client NII. So the growth of our portfolio is a good part of that explanation.
The second part that is related to spread. And you noted that quite well. There was a slight growth in client NII spread. It's still very moderate. It's just an inflection point. It's the beginning of a more robust and relevant improve going forward. So I would like to explain the lower part of growth with client NII. And there is a third part, which is what Marcelo, Cassiano was explaining. And this is related to the liability management, client funding. We are being more efficient in terms of dealing with funding from client. We are giving better results and we are working better with our mix, and this lowers our funding costs. The combination of these 3 things is what allows us to recover client NII. And as Marcelo was saying, we are already through many seeds that will allow us to say that we will have a better third quarter when compared to the second quarter.
I mean, certainly, you saw the growth of the portfolio with this mix. It's not a big spike in terms of the client NII. But it will show gradual growth. We will have an even better performance in the third quarter.
I think Ivan has joined us again. Ivan is back.
Marcelo, I would just like to say that we had an operating increased performance of Bradesco Saude in that health care segment. And this obviously puts us in a comfortable position in terms of the investment we made in the value chain of the health care segment. We do believe in this market, and we are very comfortable, and we have a very positive perspective view. And I think I hope I answered your question, and I'm available further on, if you need any further clarification.
The next question from Eduardo Nishio from Genial.
Congratulations on the results. I have 2 questions. The first is about your new client platform that you were launching. Could you give me more details about the platform? How do you intend to reduce the cost to serve? You -- I don't know whether that will be only through the reduction in the footprint of the branches or you're contemplating other initiatives that will lower the cost to serve?
The second question is simpler. You talked about implicit profit. I think analysts have their own calculation on the side. But if you could share with us the numbers that you have in mind, the numbers you use? I think through my calculations is BRL 18 billion. I just want to make sure whether that number is correct.
In terms of our client platform, we have plans that converge here. One is the positioning of Bradesco Expresso because this led us to a reduction in the cost to serve of Expresso. But this is combined with that strategy to be present in the physical world with a variable cost. This is our expectation. But we have other initiatives, not only the reduction of the footprint because we want that unit cost of serve reaches a different level with time. But we are still working with Julius's team and other teams from the different areas of the bank to take that to market when the right time comes. So thank you for that first part. And now I'll turn the floor over to Cassiano to answer your second question.
Well, we usually don't give guidance in this regard, but it seems that the market consensus is quite adequate, BRL 17.5 billion or BRL 18.5 billion. So that range seems to be quite adequate, okay? I mean, that's very close to your number. Your number was right on the spot.
Next question from Carlos Gomez-Lopez with HSBC.
Two questions. One client that I wanted to go back to market NII. In the past, the bank has taken positions for on long-term and short-term interest rates. How would you say the balance sheet is positioned today? And what will be beneficial for the short-term [indiscernible]? And the second question is a macro one than the type that Andre likes. We see that Bradesco gaining momentum is at an inflection point, as you mentioned. And what about Brazil? And do you see that demand is getting stronger, weaker? What is your assessment of the current interest? We have a lot of negativity in the market. You are also cautious.
I'll ask Cassiano to start. Asking about market NII.
Well, in this quarter, we had a reduction in market NII, and this had basically an effect on the trading. The ALM is very balanced. Our pre-fixed future portfolio is in good order together with our liabilities that are increasing. That is a natural hedging cycle. There's no other type of specific movement. So it's very well balanced. Obviously, we don't expect any strong and fast interest rate increase as it happened in the recent past. So we're working with market expectations. If everything is okay, we'll have a healthy ALM in the second half of '24 and most likely in the start of 2025.
Nothing to really add, but Carlos, our expectation is what Cassiano mentioned. We expect to have 2 quarters better than the one we've seen. That's our expectation in terms of market NII. Andre, you could answer Carlos's second question about the macro economic situation and then I'll add.
Okay. So what we have seen so follows the strong increase in the macro uncertainties and macro risk, and this is affecting a lot of financial assets, but not so much the real activity. Our economist had a slight revision in terms of GDP growth expectation. It was around 2.3% with a possibility of being something better than that. So 2024 is a year that has been very little affected in terms of economic activity, not very much impacted by the macro risks that are impacting the assets.
If that uncertainty continues, while the Selic interest rate will remain stagnant for longer. Our economist team expects the Selic rate to be at 10.5% at least until the end of 2025. And of course, that removes vigor from the economy. But basically in 2025, if the economy is not vigorous, that's not good for the banks. It's not good for those that rely on domestic activity. But we have to deal with this, just like all companies, and we'll take our internal measures to increase efficiency, trying to offset this effect, which is not under our control.
Well, I second everything that Andrea mentioned, Carlos. In terms of the outlook, we had an initial outlook of the GDP growing 2.5%. It was reviewed to 2.3%. It is good growth in our opinion for 2024. We have a very low unemployment level. And I know that this has a consequence in the monetary policy. We are following up close exchange rate because that can have an impact on inflation, which was not good. It's bad for us if we have a potential increase in the interest rates. But with this potential reduction of the interest rates in the U.S. market, it's possible we'll see a reversion of that. We'll have to monitor. I'll have to follow that. But as Andre mentioned, for next year, the growth expectation changes. If we maintain the interest rates, that's okay. And then we'll have a lower potential activity in 2025. In terms of risk appetite, we are always with our eyes open. We're monitoring them step-by-step. And if it's necessary to change the appetite of the bank, we'll do it.
Okay. We are now closing the Q&A session. Those questions we were not able to answer here will be answered by our Investor Relations team. Before I turn the floor to Marcelo to his final statements, I'd like to remind you that in our Investor Relations website, you can find the presentation that was presented here in a lot of support materials. Marcelo, go ahead.
Thank you, Andre. Thank you, Cassiano. Thank you to all of you who joined us. I'd like to thank the sell-side team that asks questions. Thank you very much for your interest in our bank. Thank you for your questions. Thank you to the investors that follow us to our clients. I'd like to stress, we are always here available to have meetings with the investors, with the sell-side team to explain any line of the balance sheet you're interested in. But I share with you a positive outlook. Thank you very much, and have a great and blessed week. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]