Banco Bradesco SA

BOVESPA:BBDC4

Earnings Call Transcript 2021-Q3

[Operator]

Good day, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Banco Bradesco's Third Quarter 2021 Earnings Conference Call. This conference call is being broadcast simultaneously over the web in the Investor Relations website at banco.bradesco/ir. In that address, you can also find the presentation available for download. We informed that there is simultaneous interpreting into English.

[Operator Instructions]

Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to the business expectations, operating and financial goals, projections are based on the beliefs and the assumptions of Banco Bradesco's management and on information currently available to the company.

Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur. 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 will turn the conference over to Bradesco.

[Leandro de Miranda Araujo, executive]

Good morning, everyone.

Thank you for joining us in our conference call. With us, we have Mr. Octavio de Lazari Jr., CEO; Andre Rodrigues Cano, Executive VP; Oswaldo Fernandes, Executive Director and CFO; Carlos Firetti, Controller and Market Relations Director; Ivan Gontijo, CEO, Bradesco Seguros; Renato Ejnisman, CEO Next and Kurt Zimmerman, CEO, Bitz.

Octavio, you have the floor.

[Octavio de Lazari, executive]

Thank you very much, Leandro. Good morning, my dear friends. I hope you're all well. And thank you for your interest in participating in our conference call to discuss Q3 '21 results. We present the highlights of this Q3 in which we had good news regarding the COVID-19 pandemic. Vaccination has advanced significantly with strong engagement of the Brazilian population. As a result, the disease is showing a downward trend indicating that we are on the right path. Given this scenario, we initiated our return to in-person work following very strict health protocols. We have returned 100% to in-person work at our branches because they play an essential role for the Brazilian population.

In our administrative areas, we have established a gradual return scheme, evolving as health conditions allow. The way we work in the post pandemic era is different, that's true. It's based on a hybrid model. All of our teams are combining in-person work with home, office as it offers benefits for workers, productivity and cost reduction. Improvements in infection and death rates have put Brazil on the path to a full reopening of the economy with an increase in economic activity. However, the scenario is still not entirely favorable.

The agenda of reforms has not progressed and inflation remains both high and persistent. The Brazilian Central Bank raised interest rates and has shown the termination in trying to control inflation. However, this should have negative effects on the growth rate, especially in 2022. With respect to our Q3 '21 operations, we saw very positive results. Our net income recovered totaling BRL 6.8 billion, up 7.1% quarter-on-quarter and 34.5% compared to 2020. Among the positive indicators, we highlight the recovery of insurance results. The good performance in fee and commission income and ALL expenses remaining under control. As a result, ROAE for the quarter reached 18.6%, and the efficiency ratio also improved an important indicator, reaching 45.4% in the 12-month period. The loan portfolio grew 6.5% in the quarter and 16.4% in 1 year. We were already seeing a good growth rate constraining individual clients for this quarter. The expansion also benefited the small and medium enterprise segment. In this quarter, we have about 1/3 of our credit originated on digital channels corresponding to BRL 30 billion, providing the client with autonomy and security to use our self-service offering. Individuals account for 50% of this total, an evolution of 58% in 12 months with 80% of credit requests coming from the mobile channel.

Lastly, I can highlight the excellent recovery in income from insurance, which grew 104% in the quarter and 2.6% in the year with the evolution of written premiums and a consistent improvement in both the claims ratio and the financial income. These good indicators have allowed us to conduct a positive review of some of the lines of our guidance, as you will see later on in the presentation.

Let's look at Slide 3, please, where we present the main items of this result. In addition to net income, which grew 7.1% in the quarter, we can highlight the strong performance of operating income of 11.3% compared to Q2 '21 and 15.8% compared to third quarter of 2019.

Numbers show a stronger growth rhythm than in the pre-pandemic period. The biggest contributions to the evolution of results in the quarter came from insurance, client NII and fee and commission income, partially offset by the reduction in market NII as expected, and higher expenses, the main factor of which being the collective bargaining agreement of bank employees, which impacted September. Annual variations are explained in part by the fact that Q3 '20 reflects the impact of the pandemic more broadly. I believe it is important to highlight the dynamics of our results. Bradesco has a diversified and good quality mix of results with banking and insurance operations that complement each other. In the last quarter, the insurance group absorbed the impacts of the COVID-19 effect, reflecting the worst period of the pandemic. In Q3, however, it has resumed. That significant contribution accounted for 23% of the consolidated income.

And when we look at the table on the bottom right, we see growth in total revenues even in this complex scenario, and a reduction in total expenses, which requires discipline, resulting in a robust and growing EBT. We will go into detail about these lines in the next slides.

Now Slide 4. Slide 4 highlights the evolution of our loan portfolio. We saw significant 6.5% growth in the quarter and 16.4% in the annual variation. This significant growth reached all lines, mainly driven by SMEs up 27.8% and individuals up 24.7% in the 12-month period. In real estate financing or mortgage, we have a comprehensive position with proprietary and partner origination channels. Origination grew 62% compared to the same quarter in 2020. In 2021, we have financed approximately 100,000 units to date, an increase of 85% compared to the same period last year.

In addition, we have a more agile process for approving and formalizing proposals. This is a true benchmark. Credit card growth reflects the increasing reopening of the economy with more transactions and greater use of credit limits. In small and medium enterprises, growth also points to the normalization of the economy with a greater demand for working capital.

In other words, we have robust growth both in the lines of low delinquency as in the lines of greater spread, which have resulted and will result in a better net interest income. We decided to revise our loan portfolio guidance as we have already exceeded the limit established in the previous guidance this quarter.

Let's move to Slide 5 to talk about our provisions. ALL expenses in the quarter totaled BRL 3.4 billion, an improvement of 3.7% compared to the previous quarter. As you can see in the chart, this is the same level achieved in Q3 '19, even considering the significant increase of more than BRL 100 billion we had in the loan portfolio. ALL expenses in the quarter represented 1.7% of the portfolio. The drop reflects the anticipation of credit provisioning we did after the start of the pandemic as indicated by our expected loss models. In addition, structurally, it reflects the growth in low-risk portfolios, the good quality of recent yields and the great evolution we have seen in credit modeling over the past few years. We continue with very comfortable provisioning ratios. NPL coverage ratio over 90 days was 297%, so well above the pre-COVID level.

Considering the entire renegotiation portfolio, this ratio was 115%. The coverage ratio should continue to fluctuate over the next few quarters as part of the process of normalizing credit conditions. The great performance that we are seeing in ALL expenses also led us to revise guidance downwards.

Let's move on to Slide 6. The renegotiation portfolio saw another quarter of decline, a trend that should continue for the upcoming periods. Although it has shown a small increase, delinquency in this portfolio is below historical levels. We can highlight the high level of provisions, which anticipate effective delinquency. The current level of provisions in this portfolio represents almost 4x the observed delinquency.

Moving on to Slide 7, please. The over 90-day delinquency ratio rose 10 bps within our expectations. There was growth among both individuals and SMEs mainly coming from the renegotiated portfolio, as I explained in the previous slide. It is important to emphasize that we still have ratios well below the pre-pandemic period. In line with our active portfolio management practice, this quarter, we also sold portfolios which in our view did not really pay for the collection efforts of our teams. If these sales hadn't occurred, the over 90-day index would have gone up an additional 10 bps. NPL creation in the quarter was BRL 5 billion. The level of provisions below NPL creation is mainly due to the anticipation of provisions after the onset of the crisis, according to the expected loss models as I mentioned earlier.

On Slide 8, client NII benefited from a higher volume of operations and higher spreads interrupting a sequence of reductions. This spread pickup is very important when we think about the next quarters. In the quarterly variation, client NII grew by 4.3% and 9.8% in the annual variation. We see an improvement in production spreads in our loan operations. We believe this will certainly benefit client NII over 2022. The reduction in market NII is due to the impact of the increase in the CDI on the ALM positions as expected, partially offset by the higher results of our own working capital.

Let's move on to Slide 9. We saw excellent evolution in fee and commission income, up 4.1% in relation to the previous quarter and 7.8% in the annual variation. The volume of credit card transactions was approximately 60 billion this quarter, surpassing periods that preceded the pandemic and even seasonal end of year quarters. This performance is responsible for the strong growth presented in this line of revenue, up approximately 8.2% in Q3 '21 over Q3 '20 and 10.1% comparing 9 months of '21 with the similar period last year.

Our checking account holders base increased by 1.7 million in 12 months, being one of the factors driving the increase in the checking account line, which posted growth of 2.7% in the annual comparison offsetting the revenue losses from PIX.

In addition, we see consistent client growth in our related companies, underscoring our ability to diversify both physical and digital revenue sources. In Asset Management, growth is due to a net capital increase of BRL 23 billion in 2021 and a more favorable mix with growth in multi-market and equity funds. In loan operations, the 8.5% growth is related to the expansion of the portfolio. We decided to review the fee and commission income guidance, since with the performance of this quarter, we have already reached the maximum point of the guidance that we have released.

Let's move to Slide 10. Our operating expenses decreased by 2.5% in the first 9 months of the year compared to the same period last year. Personnel expenses increased compared to the previous year due to the higher provision for profit sharing in view of the significantly higher income and also the consolidation of BAC Florida as of Q4 2020. However, the most relevant in this quarter as of September was the impact of the collective bargaining agreement with bank employees. Administrative expenses have decreased 0.2% as for year-to-date despite high inflation in this period, IGPM of 24.9% and IPCA of 10.2%, reflecting disciplined cost control, the evolution of digital channels and the optimization of our physical presence and processes. The growth in the quarter is mainly due to the higher business volume and higher client acquisition expenses, I would say, investment with acquisition of clients, particularly, Next and Bitz.

The variation of the line of other income and expenses is explained mainly by the change in the nontechnical insurance provision, the high-inflation scenario implies challenges for managing expenses, as many of them are indexed to price variations. We will continue to act with discipline to keep costs under control, seeking growth below inflation. We will end 2021 with a closure of 179 branches and transformation of 377 branches into business units, which will result in 556 branches closed or modified in their service and business model. Another highlight is Bradesco Expresso, which has more than 40,000 partners, a network structure around variable costs, which starts operating in a fully digital manner this quarter with a number of products such as checking accounts, loans, payroll deductible loans, credit cards and insurance in addition to our Bitz digital wallet.

Moving on to Slide 11. This is good news about our insurance operation. Once again, with significant growth in revenues more than 9% and excellent recovery in results, even with the events related to the pandemic. We can highlight the expansion of operations, the increase in the number of policyholders in all of the business lines of insurance group. Costs related to COVID-19 were approximately BRL 1.4 billion in third quarter '21 and BRL 4.4 billion as for year-to-date. It is worth noting that COVID-19 events in the third quarter were 26% lower than the previous quarter reflecting the impact of vaccination and a reduction in the number of cases. The financial income was very positive, reflecting the effects that economic financial ratios in the period had on our financial investment. Our net income presented robust performance in line with last year despite the 5 percentage point increase in the CS LL rate.

If we exclude this effect, we would have seen a 2% expansion compared to 2020, even with all the effects of COVID-19 in 2021. Like in the previous quarter, the scenario is still challenging, but based on what we have observed, we are reviewing the guidance again as we look ahead for the insurance company.

On Slide 12, we show examples of the strong growth in revenues of our insurance segments confirming our perception that this is an essential critical service in a core business for Bradesco. Traditional insurance was always a sowed product. And I would say that after the pandemic, insurance now is purchased. So we can see the progress in installments and in home insurance, life and health, all growing very significantly. We managed to capture this opportunity based on our wide offering with diversity of products and channels for each profile and moment of life of our clients. And that's a very important point in our bottom line.

Slide 13, just to be more transparent, just as we did in the previous quarter. Here, we show the history of pandemic-related hospitalizations on a weekly basis in our healthcare operation. As you can see, we are at the lowest level of hospitalization since the beginning of the pandemic. And please bear in mind that in the past we used to be more problematic and severe and long-stay hospitalizations, owing to the impact of the disease and of -- now not only do we have fewer cases, but they are also not as severe owing to the successful level of vaccination in the Brazilian society. So Bradesco Insurance did it homework. Insurance, in addition to buying insurance in order to prevent problems and claims. At the end of the day, people want to feel they are safe and sound. And Bradesco is fulfilling its mission of taking care of health, life, the welfare and the future of our clients, which is the core mission of the insurance group. On Slide 14, we show the same chart but rather than a per week evolution, we show on a monthly view. And this trend for the better is expected to continue. We can see the number of hospitalizations on a monthly view as we can see on Slide 14.

Now on Slide 15, let us talk about our capital ratio. Our Tier 1 ratio was 13.7% this quarter, very robust and well above the regulatory minimum. The same applies for our liquidity coverage ratio and our net stable funding ratio, we saw a 40 bps drop compared to the previous quarter caused naturally by the growth of the loan portfolio, which is good and also owing to the mark-to-market of securities.

Now on Slide 16, let's talk about the use of digital channels. We had a significant increase in the use of digital channels, which offer unique convenience to our clients. The volume of mobile financial transactions increased 92% compared to the previous year. The number of accounts opened on this channel also grew 84% in the same period, exceeding 1.2 million accounts. This year, we already have BRL 62.5 billion in loans from digital channels. This accounts for 29% of the total originating from the bank. If we focus only on the performance of the individual segment, digital already accounts for 53%. The numbers show the evolution and diversification of our distribution channels and business sources. The digital Bradesco, it shows a reduction in reliance on the branch for transactional activities. The future of branches fundamentally depends on the evolution towards a more consultative role for clients.

Moving on to Slide 17. As we know, we have BIA for a while now. We had a pioneer in launch. It is the application of technology to support and assist clients depending on their questions and needs concerning products and services. BIA gradually adds new information in the interaction with the client, thus becoming more robust and assertive. The total number of interactions with clients reached the remarkable mark of 396 million this year alone, which accounts for an increase of 25% compared to last year. On WhatsApp, we had 39 million interactions. Currently, BIA accounts for 100% of the first level support on Bradesco's Fone Facil helpline. It is also responsible for the first level support in the employee call center. BIA is currently able to share knowledge on more than 90 products and services, and we have a squad, a dedicated BIA squad and soon it will be connected to CRM, and we'll start making proactive offers always according to the needs and expectations of our clients in their journey.

On Slide 18, let's address digital transformation. Following our client-centric digital transformation strategy and taking into account our pillars of people, technology and business, we created the Bradesco experience, a department that integrates experience, digital channels and platforms for the creation of intuitive and customized journeys of financial services and nonfinancial services leveraged by partnerships. All of this using data intelligence and the voice of the client, which helps us to understand their behavior regarding the use of e-channel and their respective transactions. This enables us to provide more fluid experiences within and between channels. The department has professionals highly skilled in digital strategy, platforms, new design disciplines, journey analytics and already has an agile mindset, which means that our professionals are positioned in the various squads of the bank in multifunctional groups.

Just to give you an idea, our BE Bradesco experience already has more than 1,000 professionals involved in the whole relationship journey with our clients. In total, our squads and tribes already add up to more than 3,000 professionals. In other words, in addition to acquiring some start-ups like DinDin and 4ward and investments of our private equity fund, we also have created and developed our whole digital environment.

Moving on to Slide 19. Let's talk about Agora. Agora reached 706,000 clients and increased 70% in net funding compared to the previous year. The small drop in the volume under custody in the quarter reflects only the mark-to-market due to the increased volatility in the markets this quarter.

Next reach 7.7 million clients above the 7 million target for the year, and the new target is 10 million clients. December 2021, we want to have 10 million clients, this represents a 141% growth in the annual comparison. Next is a comprehensive bank and its mission is to provide clients with innovative solutions. It is increasingly a platform for products and services and now also with a marketplace, which is launched this week. Bitz, the digital wallet we launched at the end of last year has reached 2.1 million accounts, and this week, it surpassed 4 million downloads. It has become the entry-level solutions for those who want to be in the banking market and thus plays an important role in client banking. And it comes with an extensive network of bank correspondents, Bradesco Expresso with more than 40,000 service points. Bitz and Next are totally separate from Bradesco Bank, and they have autonomy in the decision-making process as CEOs. And in next, we have Renato [Foreign Language].

Moving on to Slide 20. In this quarter, we made a purchase offer to obtain 100% of Digio shares, and we are awaiting regulatory approval. Digio was created as a credit card operation and has since expanded to become a bank that offers accounts, personal loans and cashback solutions. It has 2 million cards and a loan portfolio of BRL 2.5 billion. Digio adds up to our portfolio of digital companies, and we remain separate as it is in a moment of significant expansion, and we do not want to change this.

Moving on to Slide 21. About sustainability and ESG. In Bradesco, sustainability has always been embedded in our purpose. You all know well what we do with the Bradesco Foundation for many decades now. And we are committed with the positive impact agenda in ESG. In the context of the COP 26 discussions, we are present in Glasgow following the agenda, present at meetings and also strengthening our commitment to mitigating climate change. As a financial institution, we took a leading role engaging our clients and supporting them in the transition to a greener and more inclusive economy. Climate change is part of our sustainability strategy. We comply with Net Zero as the first Brazilian bank taking part in this commitment. We also highlight our recent partnership with Enel X, which should reach a reduction of 12,140 tons of CO2 equivalent per year. Our actions have been confirmed through this recognition of the main ESG ratings and indexes in which we have been evaluated as being above the market average.

Let's look at Slide 22 now. And this is where we show our guidance. As we said before, we've made changes to 4 lines: loan portfolio, fee and commission income, insurance and ALL. In the loan portfolio, we had a guidance from 9% to 13% and now we have 16.4% growth compared to last year. And we decided to change this range from 14.5% to 16.5%. In NII client portion, we are at 4.7%, and we believe that we will end the year between the middle and top of the range. In fee and commission income, we used to have a guidance from 1% to 5%, and now we are at 5 already at the maximum point of the guidance that we published at the beginning of the year. And this is why we decided to change the guidance from 2% to 6%.

In operating expenses, we are at minus 2.5%, and we believe that we will end the year close to minus 1%. In income from insurance operations, our guidance is minus 15% to minus 20%. And currently, we are at minus 19.5%, and we decided to review the guidance as the evolution proved to be better than expected vis-a-vis COVID and financial income. Now the guidance for this line is from 0 to minus 10%.

Finally, in expanded ALL, the guidance was 0 to 0.17. We have BRL 10.8 billion for year to date, and we revised the guidance from 13 to 16, and we believe we'll be between and the top of the guidance.

Now on Slide 23, we just want to extend the invitation to all of you to participate in our Bradesco Day, which will take place on November 10. We hope you can all join us. It will be a pleasure and an honor having you with us. And before we begin the question-and-answer session, very briefly, I would just like to give -- to make a slight comment about our expectations for 2022. We all know -- and by the way, this is part of our outlook about economies and the comments of the market in general about a challenging picture in 2022. We have all these challenges ahead, and we take it all into account. However, we're doing everything we can so that year 2022 becomes a year of growth at Bradesco Bank. That's a condition that we really commit to.

Every year in the eve of the earnings conference call, we have a meeting involving the whole management of the bank, the Board of Directors to address results and expectations. We are working on our numbers for next year. And we're very confident that this budget is based on a zero base expense. So every penny is evaluated starting from significant gains of scale that the bank has been achieving, and that's something that we witnessed. You can see this in the presentation that we are delivering our ability to have gains of scale within the organization. And at the end of the day, we believe that despite -- despite the outlook for next year, our job is to work envisioning growth for 2022.

And this is based on a couple of points, which is worth mentioning to you, ladies and gentlemen. For next year, despite all this outlook, agribusiness and cattle-raising the GDP is expected to grow a lot in 2022. And Bradesco has a very important stake there only second to Banco do Brasil because all the funding Banco do Brasil has in agribusiness. But we expanded our regional offices for farm credit throughout the country. So our outlook is great when it comes to Agribusiness. In addition, we are having a resumption of the company. And certainly, it expected to be full in 2022, unlike what's happening in the current year, which is only partial. So with full activity and full resumption of the economy, this certainly will bring more job opportunities, more job positions informal and formal, but at the end of the day, this should foster growth and bring more business opportunities.

We also bear in mind that states have one of the highest cash and cash equivalents of the history. And because it's elections here, everybody will invest. Our bank has a massive footprint in states and municipalities with payroll from many municipalities, many state administrations the ability to generate business and grow and also high in our agenda. And Brazilian companies also have lower indebtedness for a decade. If you think about 10 years, this is the lowest level and the impact of select high rate should not be expected in company's balance sheet. So there are opportunities for growth in the future. This quarter, the wholesale bank increased very well.

So I believe that's also a significant indicator when it comes to next year's growth. On one hand, there might be this outlook. On the other hand, we envision opportunities that should bring growth to our organization. If we think only about the Brazilian GDP this year, it should grow 5.2% -- 5%. Just the carryover effect of the GDP growth this year with the statistical carryover for 2022. This alone will be another 0.75. So these are some indicators, some assumptions that should bring us a better business. We understand that Bradesco has visibility to grow. We are not going to create difficulties to create a way to overcome them. We are working, thinking about growth for next year in terms of our loan portfolio, our margins, number of clients, and we should remember that if we look at Bitz plus Next plus Digio, we're talking about 12 million clients, who practically have no relationship with Bradesco. 75% of them are not the Bradesco clients. So there is a huge capacity to generate business with this kind of growth in our client base. This is just some information, some extra data that leads us to think that in 2022, despite the economists' expectations, that 2022 is a year where we have to work to grow our business, and this is what we are going to do in 2022.

Thank you very much for your attention, and now we will start the Q&A session.

[Operator]

[Operator Instructions]

We'll start with Jorg Friedemann.

[Jorg Friedemann, analyst]

Congratulations on the results. Thank you for the presentation and for the additional information. I have just 1 question, but it's divided into some sub questions. And I think it's going to be kind of long, building on what you mentioned in the end of the presentation regarding the 2022 outlook, if possible, Octavio. I would like you to elaborate a little more. I know but this is still -- the bank is still in the process of putting together the budget. But if you could elaborate your expectations regarding the main lines for next year, for example, how do you see the possibility of the bank delivering a cost number that would be in line with or below inflation, considering not only the inflation rate of this year, which is very high, but also salary adjustments of 1%. That's the first sub question. The second part of the question has to do with provisions. Do you believe that next year you can increase your provisions less than the portfolio? Why am I asking this? I'm looking at these additional provisions. You still have additional provisions, which are way above the historical level in 2017, '18, '19, and additional provisions were at 6.9%, and you're still at BRL 10 billion. So could you convert to those historical levels and grow provisions less than the portfolio next year?

And the last part of the question would be regarding insurance. Insurance in this year with an ROE below the ROE of the bank, which historically didn't happen for a long time. So with a better outlook, and from what I understood, with the new guidance even in the lowest range that implies an ROE of around 20% for Q4. So for next year, can we expect the insurance ROE also above 20%? Thank you very much.

[Octavio de Lazari, executive]

Thank you for the comments and the questions. I'll turn the floor to Ivan to answer about insurance, and then I'll answer the first 2 questions. Ivan Gontijo, can you comment on insurance for Jorg.

[Ivan Gontijo, executive]

Of course, Jorg, thank you for the question regarding insurance. We spent 2021. This was a hard year with a pandemic. A pandemic happens in the world historically every 100 years. If somebody says that they could expect what would happen in Brazil in the world with all the effects, not only related to health, but also related to social and economic effects. If they said that they could envision this, they would be lying. No one could predict that. We had to live with a totally different world with some negative side and also some upsides, particularly from the social and humanitarian way because people started looking at one another differently.

Now to answer your question directly. In addition to make a regular payment of the claims that we would normally have and which were priced, we were able to pay BRL 4.5 billion in several companies in Bradesco Health, Bradesco Life and savings bonds and body. Only claims related to COVID, not to mention of the claims that were obviously priced already and which are part of our day-to-day operation. Now that shows the solidity of our balance sheet, the strength of our numbers and of our assets. They give us comfort to above anything, continue to provide the best health care and hospital care in Bradesco Sa篓虏de, Bradesco Health. We can continue to provide the best service to life insurance holders and to loan insurance policyholders.

And on the economic side, we had a positive reality, a 9% growth in the first 9 months of '21. And if we were to list by product, we can see growth in the 9 months of 2021 of 34% in homeowners insurance because the home became a fundamental element for people. So having homeowners insurance and people stay most of their time at home working remotely, it makes a huge difference. They want to have protection for their home. We grew 24% in loan insurance. We grew auto insurance by 20%. We grew health insurance by 5%. In health, our health product is on everyone's wish list in Brazil. And in life, we grew 18% in the 9 months of 2021 year-to-date.

So looking at all that, and considering that society now understands that insurance is needed, we are looking at 2022 with a positive outlook. We should have sustainable growth, and we still have a tail for Q4, but growth in Q4 will be posted with a reduction of COVID-related claims. And looking at 2022, our prognosis is extremely positive. I don't know if I answered your question.

[Octavio de Lazari, executive]

This is perfect, Ivan. And Jorg, thank you because you helped me give Ivan a target for next year. So thank you very much.

Okay, above 20% return on equity. It's a given target then. We will pursue that. And we are quite convinced that the insurance company will give us an ROE above 20% next year. I just would like to add something, Jorg. You asked the question, which was a very smart question actually. If you get the insurance company, the health insurance, it paid more than BRL 6 billion worth of claims because of the COVID-19, and this was no one's as Gontijo mentioned. It wasn't something that we budgeted for. But issuance had the ability, resilience, a balance sheet robustness and enough provisions to accept these extra payments that we had to make totally out of the curve. And this is the burden of having an insurance company. But what are all of the upside of having an insurance company? There are many. So this was important. We were able to overcome. We still have a tail of effect, but much smaller from what we can see with the progress of vaccination and the engagement of the population in lower cases.

So the outlook for the insurance is very good. Like I said, not only in Brazil, several CEOs of insurance companies worldwide that we have been talking with are saying that there has been a structural change for insurance in the world. People are not buying insurance. We don't have to sell insurance. Now people are coming to us to buying insurance, particularly in our country where insurance penetration is very, very small, around 4% to 5% of the Brazilian GDP. So we have a huge avenue ahead of us for growth. So insurance will continue to be fundamental and an integral twin partner of the results of the bank.

As regards costs, Jorg, our mindset is -- well, I have spoke a little about this, more than 550 branches that we are restructuring not to mention the 1,000 branches that we migrated in 2020. We'll remember that. In Q4 2020, we reduced our expenses substantially. We are adjusting the structures 2022. We'll still have some structures to be adjusted around 300 branches that will be tackled in 2022.

So despite inflation rate, despite of all that, we should be below inflation. We will work on costs to keep them below inflation. I think that the Bradesco cost discipline is translated in our earnings so far. Even with a 10% salary adjustment, and you know how heavy payroll is in a financial institution like Bradesco with almost 90,000 head count. So it's huge. So despite a 10% salary increase for our headcount, we are reducing expenses by 2.5%. We still have room to adjust the structure. What I can tell you is I'm quite convinced that costs will be below inflation.

As regards provisions, you said it well. If we observe and we included that in the presentation, the provisions that we have now in Q3 2020 were exactly the same provisions we had in Q3 2019, although we have a portfolio BRL 100 billion greater than in 2019. And we have a coverage ratio of [ 297% ], which is the biggest in the world in the market. So we have enough provisions. Over time, along 2022, this should be reduced a little -- a lot due to an effect of the loan portfolio increase.

And then you might be asking, Octavio, what can it be? I'm not going to give you a guidance for the loan portfolio, but I can tell you it's going to grow 2 digits, Jorg. So along 2022. We are going to consume some of the provisions and delinquency, Jorg. If we look at our delinquency ratio, it is at it's lowest historical level. It's not 5.5% as it was in 2016. That was an all-time high. Now it's down to 2.6% half. But let's get the average. Around 4%, 4.3%. We're at 2.6%. So we have a lot of room and should grow delinquency. I mean should grow a little, but I think that we have learned to be more disciplined, to have the right balance between risk and price. The evolution of our credit modeling for a loan granting is also an indicator. So I should say that our provisions will be in line with the loan portfolio growth. And our client NII will be in keeping with the portfolio or slightly higher. So we are quite okay regarding our provisions and the ability to grow next year.

[André Rodrigues Cano, executive]

Can I add something? Jorg, this is Andr篓娄 talking, Andr篓娄 Cano. In addition to what Octavio mentioned, we have this process of digital transformation, a greater digitization. And all that leads to a lower cost to serve, to serve all these clients. Also, investments we've made in recent years in technology also brings us greater productivity. Additionally, all the management of the bank is focused on restricting cost. We'll look at that every day and focus on how to reduce costs. So I think that adds to what Octavio said regarding next year having costs below inflation.

[Jorg Friedemann, analyst]

Perfect. Thank you very much for your comments and for very comprehensive answers.

[Operator]

The next question is from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

I have 2 questions. My first question, I would like Bradesco to address client growth, particularly the strategy for growth. You've shown the total number of clients, business clients improving by 1.3 million this quarter, the 72.5 million and next post growth of 2.3 million clients this quarter. Bradesco also announced that it will acquire the remaining part of digital. Digital has 2 million credit cards, for instance. How do you see the acquisition costs for new clients in different segments compared to the past? And what should we expect to see in the future? And my second question is, what is the outlook at Bradesco for market interest rates, more specifically Selic and also 10-year bonds, government bonds. What are the interest rates? And could you also comment on how Bradesco is considering capital cost or IOC for every segment?

[Octavio de Lazari, executive]

Jason, the growth in the customer base, client base was very significant, both at the bank level and also in our digital business like next and Bitz. Actually, the cost of acquisition of customers is an increasingly strongly challenge for us. It's important to say we have a couple of sources that are very significant to grow our client base. And we're focusing on our ability to reduce the cost of acquisition of customers. I consider this to be investments. At the end of the day, it becomes a profitable client adding income to the bank. If you think about the base of the insurance company, we have million of customers who are not Bradesco customers. So we are working on this space to acquire more customers.

If you think about the credit card base, there are a lot of partner credit cards, they don't have these customers, don't have current accounts. So there is very low acquisition cost because it's directly operated by our war rooms, our squads for customer acquisition. If you think about Bradesco Consorcios or Bradesco Financing, which works within dealers, for new cars, for instance, which is a different client base. So I would tell you that we have a blue ocean. I'm not going to say it's a red ocean. In the red ocean, you would fight in the market, you have to pay Google and cost of acquisition of customers.

Naturally, you keep on doing that. But what we do in the base of people who already use Bradesco channels, 20% of the Brazilian GDP is paid via bank slips in the branches and Bradesco's digital channels. So this is very representative. At the end of the day, this will all help us to reduce on a monthly basis, the cost of acquisition of customers. So maybe that's about our strategy. Rather than relying so much on external channels, you can work on this blue ocean in the organization in this aquarium, considering all the companies we own.

With regards to market rate, we project a Selic rate for next year of 10%, 25%, if I'm not mistaken. I guess that's the projection according to [ Fernando ]. So lake of 2022, 1025. That's the right number. That's our expectation for next year. We're still waiting for the Central Bank. It's a challenge to all of us, but this improves our funding revenues, income and also our revenues from credit operations. So a growth in spread, as you can see, we already make up new yields with a better spread than we had in the past owing to the increase in spread, and we can see this growth taking place.

And the last part of your question, Jason, would you mind telling me -- did I address all the topics?

[Jason Mollin, analyst]

Cost of capital in the framework of an increase in rates. And how do you see this behavior taking place in the future?

[Octavio de Lazari, executive]

Our number is 14%. From the moment interest rates are confirmed, this future curve is confirmed, chances are the cost of capital will slightly increase. But today, we are at 14%.

[Renato Ejnisman, executive]

Octavio, can I just say something? [ Renato speaking ] And just adding to the comment about the client acquisition strategy. Jason, in next we really accelerated the process last quarter, and we still experienced very strong growth right now. However, it's interesting to see that the cost of performance in the third quarter went down in our case. So what's behind this? Although we accelerated our growth, there is a number of factors, more products, more funds, CDB to 100% CDI, other insurance products. So we have more use of data intelligence and therefore, the customer experience becomes more interesting. But in addition, we also changed our market strategy in the market funnel, awareness and performance. And when it comes to awareness, we have a very successful campaign with [ Vernac ], and she is now launching this marketplace. But the thing is, next turn out to be more popular. And despite this growth, we even reduced the bidding price. And when we think about Black Friday, Christmas, maybe there is a seasonal increase. But at the end of the day, this is manageable. We can work on a growth strategy in which we managed to run your acquisition cost well. And we measure this using CAC going by cohorts, and we measure to make sure we post growth and a healthy growth.

[Octavio de Lazari, executive]

Good point, Renato.

[Operator]

Next question from Flavio Yoshida with Bank of America.

[Flavio Yoshida, analyst]

Congratulations on the earnings conference call. My question is about origination of new credit and loans. I'd like to have a better understanding. What about the rates, the behavior of the rates? My concern is about the pressure in the cost of funding, considering Selic rate is going up? Okay. In the beginning, you might see some pressure because you have more intense liabilities and Selic going up. But your portfolio, particularly for personal loans is not in the same direction. So what do you do to work on this spread over time? I want to know if there is a fierce competition scenario and if it's tougher to do it at the end of the day?

[Octavio de Lazari, executive]

Flavio, it's a pleasure to talk to you, good point. This is always a stronger challenge when interest rates are high and then it goes down suddenly, it's great for us because you have a higher interest rate in your origination. But when it's the opposite, from 2 going up fast, the challenge becomes tougher. Two important points here. First, we transfer even more for rates immediately, immediately. That's the first point. Second point, our personal loan portfolios, except for real estate funding, that's a different piece of funding, mortgage, there is a longer duration. But as for other individual portfolios, we can run them very fast, very quickly. What we see is that we are running, we managed to run and renew our portfolios at higher than 100%. So we are running the portfolio faster Flavio. So you have payroll deductible loans that customer has to come to get the exchange and then you work on the price again. And personal loan, digital provides great support in this sense because you can have a challenging offer. You give a little bit more money for a longer duration, better interest rates and then you can make up your portfolio with a better spread.

So this is all with this squad and tribes, and they include 100 or more than 100 people working there, submitting challenging proposals to our customers so they can work on an option and contract the option right away. So we manage to renew our portfolio at a faster pace compared to the past, precisely owing to our need to run the portfolio at a better interesting rate. So that's a big challenge, but I have to say that we managed to do this quickly. But the price was fully transferred with a slightly higher level.

[Flavio Yoshida, analyst]

Got it. So could we assume a margin growing up in this portfolio?

[Octavio de Lazari, executive]

Absolutely, that's a condition, an essential condition.

[Operator]

[Foreign Language] Pedro Leduc with Ita篓虏 Corretora has the next question.

[Pedro Leduc, analyst]

My question has to do with the spread. We saw the guidance for 2021, pointing to a portfolio growth with no review in terms of client NII. So I think you are considering a more challenging scenario for the spreads than what you imagined before. Perhaps you could elaborate and help us understand if this is going to have an impact on funding, if there is a worsening of the funding mix, perhaps fewer savings deposits. I'm not the expert here? So I would like to know what your hypotheses are with this guidance review of the portfolio of an NII down? I would point, in my opinion, to a credit fatigue. So that makes me -- I find it difficult to know how you're going to increase the credit margin without having to incur more credit risk?

[Octavio de Lazari, executive]

Pedro, thank you for the question. Actually, we reviewed the guidance because it ratifies our expectation for 2022. We reviewed our loan portfolio growth but maintaining client NII is at 4.7%, and we maintained our guidance from 2% to 6%. So obviously, there is a challenge, as I just explained to Flavio of running the loan portfolio, working in the loan portfolio to improve the spreads. And we are able to do that. And that is shown in the improvement of our spread. Now there are some points that you observed and that are pertinent, which is the portfolio mix. Today, we have a lot more markets. We have a lot more payroll deductible loans, host rate is determined by INSS, which is crazy. They determined the loan rate. But it is what it is, and we're working with them to increase the maximum rate was 180 when the Selic rate was 2. Now Selic is much higher. So we have to discuss this with INSS. In the coming days, we'll be able to revise the interest rates.

[Pedro Leduc, analyst]

Okay. And for 2022, you mentioned an NII growth together with a loan growth -- loan portfolio growth. So you don't think you have to take more risk to improve the NII? You remain with what you have, but with better NII. Is this a fair statement?

[Technical Difficulty]

[Operator]

Please hold. We are reconnecting with Bradesco.

Bradesco management, you can proceed.

[Octavio de Lazari, executive]

Pedro, can you hear me now?

[Pedro Leduc, analyst]

Yes. Yes, I can.

[Octavio de Lazari, executive]

That's good. So on the side of the assets, we have the ability to raise funds from clients with better prices because we have a big retail distribution network with more 1,000 branches. If you pay [ 98 ], [ 95 ] in the retail funding when the interest rates felicitous at 2, your spread is 5 of 2. When you pay 95 with a Selic of 6.5, 7, 8, or 10, this is expected, you're going to get 5 of 10. It's a huge difference. These points make us believe that we'll be able to maintain our client NII. I think it's clear. And the change in the portfolio mix is being offset by a worse spread here and there.

[Pedro Leduc, analyst]

And for 2022, you don't see the need to improve the average spread of the portfolio?

[Octavio de Lazari, executive]

We will grow. I said before, then next year, we are going to grow 2 digits. I cannot give you a guidance, but we are going to have a 2-digit growth. Considering this growth there is another important point, Pedro. I think that financial institutions have learned to grant loans more adequately. And that's why we see improvement in the delinquency ratios. We learned, and I particularly worked for 12 years in the credit department of Bradesco.

The difference between the poison and the antidote is the amount that you give. Sometimes you cannot give BRL 1,000 to a customer. You give them a loan of BRL 100, BRL 200, they pay, you increase their credit limit. And that's how you bring your delinquency down and you improve your earnings. Our challenge is to continue to grow in our smaller spread portfolios such as payroll deductible loan and real estate financing that can stop because it's the foundation for our loan portfolio. But the higher or the better spread portfolios. That's the one we have to grow, personal loans, overdraft and other business lines.

[Operator]

Next question by Thiago Batista with UBS.

[Thiago Bovolenta Batista, analyst]

Congratulations on the results. I have 2 questions. The first regarding the bank strategy. Clearly, Bradesco is developing many brands next, DGO, Bitz, and they kind of compete with each other and with new players? My question is, do you have any idea if in the long term, these companies will continue independently or if they can be grouped together in the digital initiatives of the bank? Under a broader umbrella of a more digital bank. How are you thinking about this possibility of offering a wide range of companies and brands separately, not directly linked to Bradesco? Could this become like a digital company, a digital bank, grouping together these brands?

And the second question is a follow-up question regarding the sale of portfolios. I think that in the past, the bank did not sell portfolios. Now the bank is selling portfolios. We used to complain before were complaining now. So you sold something like BRL 1.2 billion, BRL 1.3 billion in active portfolios. I'd like to understand your portfolio sales strategy. Could you give us more color, is this your new portfolio that was renegotiated? I just want to motif the impact of that gain in ALL and not in margin.

[Octavio de Lazari, executive]

Okay. Thank you, Thiago, for the question. I really love this question. Thiago regarding next, Digio, Bitz and the digital strategy, you see initially we will maintain this business running separately. Next is totally separate from Bradesco. Digio and Bitz were born separately from Bradesco. And we'll keep these brands running separately. And why so because these are 3 businesses that have taken off. They have taken off already and you know as much as I do. Whenever you have a merger acquisition there is naturally some time when you have to stop, step on the brakes adjust the structure, identify the core banking of each one of the players. We have to adjust products and services offered to clients. So there's kind of an induced paralysis, which is very, very bad for business.

And if you look at the 3 brands next, next more than doubled their clients this year. We had a budget of BRL 7 million.. Now it's BRL 10 million. And that's already has BRL 10 million in mind by year-end. Bitz that started last year had a budget of 600,000 accounts. They are up to [ BRL 2 million]. Digio, which is a bank we are still buying growing a lot this year. So if we were to merge all of the digital brands together, we will lose efficiency, quality and growth significantly. So we have 3 very competent CEOs, Renato with next. [indiscernible] in Digio, and they understand this business quite well.

And Renato, CEO of next. So it doesn't make any sense to make them stop or land their plane to reorganize everything. I don't think it would be adequate. It wouldn't be logical on our part to do that. So for 2022, we want to push these 3 businesses, so that they can grow even more, so that they can grow strong. And then we'll adjust the structures. We have the technology teams of Bradesco and of these companies, and they will adjust things to just a banking core if eventually, one day we decide to merge all of the businesses, we'll be ready. There will be no impact for the client for production and for the business.

So I can tell you with a lot of confidence, Thiago. Right now, we will not merge anything. In the future, eventually, end of 2022, please ask me the question again, and I might be able to say something different. Eventually, we might think of something, but definitely not now. Now it's about stepping on the gas to grow the business. Then regards the sales strategy, you used to complain because we didn't sell portfolios. Now you complaining because we are selling portfolios. Yes, I know. There are some reasons for that. In the past, we didn't sell portfolios. First, because the prices that you would get for your sole portfolio were comparatively to my ability to collect in-house very, very bad.

It wasn't worth selling the portfolio. And Thiago, you will remember, there were no companies buying portfolios. Now they're half a dozen, 7 companies, they are very good, disputing the market to buy portfolios. So we thought, okay, there is a portfolio past due over 5 years. Let's take it to the market, see what we can get, and let's compare with our ability to collect. An additional advantage, we are one of the partners of [indiscernible]. So we can really assess [indiscernible] ability to collect past due credit and our ability to do so in-house.

So we though why maintain our collection team so big at the bank, if I could sell these portfolios with a better price. The model that we get today when we sell these portfolios is infinitely higher 10x, 12x, 14x higher than what I could do internally.

So the strategy is, we'll continue to sell portfolios past due loan portfolios, and we'll basically sell all of these portfolios that have been sold. They have been written off. We recently sold a portfolio that we can call it active, but it was an active portfolio with 90, 125 days past due. So it was almost like a totally past due portfolio. And we wanted to experiment because then we have a control group of that portfolio in-house to adjust our collection ability in and the sold portfolio, and we can see the level of recovery and we can compare and we can conclude whether it's more efficient to have fewer people here to collect past due portfolios vis-a-vis selling our portfolio to a partner that today is paying me a lot better.

[Thiago Bovolenta Batista, analyst]

And just to confirm the impact that was in the provision NII?

[Octavio de Lazari, executive]

The impact is in the ALL lines. But to give you an idea, since we've been selling portfolios we recorded compare Q2 with Q3, we are talking about BRL 70 million of tax. That's very little and [ price ] 10. And if you think about delinquency, while we changed the delinquency would be 0.10. It's a very little, Thiago. We are making this decision because of efficiency.

[Operator]

Next question, Pedro Leduc, Ita篓虏 BBA.

[Pedro Leduc, analyst]

This has to do to potential dividends. You seem to feel very comfortable when it comes to the quality of the portfolio and the outlook for 2022. Earlier this year, in 2021, there was pent-up demand, and it was limited in uncertain scenario. We thought about waiting until the end of the year to consider more dividends. But now we are almost at the end of the year, and you seem to be very comfortable. Apparently, there is more room as far as capital is concerned. What about the tax reform? Maybe we don't have such a negative BIS factor and also considering personal loans. So what about the discussion for dividends or particularly higher dividends for the end of this year and early next year?

[Octavio de Lazari, executive]

Pedro, thank you for your question. It's a pleasure to talk to you again. Pedro, we'll go back to our historic distribution levels. Please bear in mind that buyback and repurchase also resumed. We are assessing everything, but we tend to go back to our historic levels of dividend payout.

[Pedro Leduc, analyst]

Could you anticipate if it would be higher, considering the comfortable levels you currently are?

[Octavio de Lazari, executive]

That's what we are searching for, Pedro. That's a current topic. We are constantly assessing in order to bring more and more returns to our shareholders. That's why it improved the banks buyback levels. And certainly, our goal once capital is enough, and that's something we do. And as long as we have good provisions and robust balance sheet, we want to give a better return to shareholders. And it takes a whole year to do that.

[Operator]

Now we have the closing remarks.

[Octavio de Lazari, executive]

Ladies and gentlemen, thank you very much. It was an honor and a pleasure being joined by you all at this conference call. We hope we answered your questions. And should you have any pending questions, don't hesitate to contact [indiscernible] to have your questions answered. Bradesco is always there for you. Just highlighting once again our trust and our confidence despite all difficulties, we believe that in 2022, we'll manage to build an even stronger balance sheet, posting strong growth. Please bear in mind that Brazil is very resilient despite all difficulties, but the goal of the management team, I think the message told by everybody, everybody is engaged searching for an even better growth for 2022. Thank you very much. Have a great Friday and a great weekend, all the best.

[Operator]

Thank you. This concludes Bradesco's conference call. Thank you all for joining us. Have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]