Banco Pan SA

BOVESPA:BPAN4

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Banco Pan's earnings call. We'll be presenting results of Q1 2023. The audio and the slides of this earnings call being broadcast simultaneously over the company's IR website at www.bancopan.com.br/ir and also through the webcast platform. This presentation can also be downloaded. [Operator Instructions]

Projections about future events are subject to risks and uncertainties that may cause these projections to differ from those forward-looking statements. These projections are based on opinions based on currently available information, and the company is under no obligation to update them. We have Mr. Carlos Eduardo Guimaraes; Banco Pan's CEO; and Mr. Inacio Caminha, Head of Investor Relations and collections are here with us today. I'll turn over the floor to Mr. Carlos Eduardo Guimaraes for his presentation. You may have the floor now, sir.

[Carlos Pereira Guimaraes, executive]

Good morning, everyone. Thank you for attending yet another earnings call. Let's start on Slide 2. We have stable results despite a still challenging scenario. Our strategy has been conservative as far as credit origination is concerned, focused on collateralized products. We originated only 1% of credit in the quarter. We have expanded our B2C origination. We had improvements in the customer experience of our app on top of the growing marketplace with Mosaico and Mobiauto integration in our channels. On to Slide 3. We have 25.2 million clients, more than half have some credit exposure with us. We have reached BRL 393.3 billion of credit, our quarterly income was BRL 193 million. ROE was 11.6% per year. Next slide, please. We now have our business verticals. Let's start with vehicle financing. We have boosted our production in the quarter with a better anti profitability. We've had excellent experience. It's a simple product and the contracts are strictly conducted. Looking forward, delinquency levels are going to be above historical level, not only for bank but also for the industry.

And we hope that our profitability is robust because we have the proper pricing for that risk. Second vertical, payroll loans and FTTS, ROE is stable despite the interest rate decrease. We hope to expand our B2C origination for these products. The third vertical, we have been very restrictive not only in origination but also in the limit management. We have drastically reduced our exposure in that segment. Looking forward, we expect an important evolution as far as experience is concerned and a dramatic reduction of PDV expenses throughout the second half of the year. The fourth vertical credit assignments, profitability at expected levels, and we'll keep on striving for diversification with new counterparties.

On to the next slide. This is our outlook for the year as the bank as a whole. We expect to expand our net due to a small reduction in delinquency rates and the gross spread we're going to expand the B2C channels in our origination. We remain conservative as far as credit origination is concerned, focusing on collateralized products. We're going to have cost efficiencies. We'll be integrating our products into channels even further, steering our customers to the app, and we have an important progress in our transactionality experience. We'll be looking for recurrence and recommendations. I'll turn it over to Inacio now, you'll give us more details about the figure.

[Inácio Caminha, executive]

All right. Moving on. Let me give you some update on our customers and our business lines on to Slide 7. We see that UX improvement, not only on our channels, but also in our product generating even more engagement. As you can see on the chart at the bottom, total clients. That was a 30% increase for the year, 25.2 million clients, the activation levels on an upward trend despite restrictions in the credit card arena, as Carlos said, cross-sell index remains stable at 2.1%, but we also believe that it's going to grow throughout the year, just like we've seen the PIC keys that started the year on a growing trend, reaching 7.4 million purchases, and our PIC has a very differentiated experience when compared to that of other banks.

Transaction volumes, we are at BRL 22 billion for the quarter. There is a natural seasonality of the first quarter. When you look throughout the year, it was a 12% increase. On to Slide 8 now. This is some detail about retail origination. We remain conservative, reaching BRL 7.6 billion. The highlight is vehicles and the workers' compensation fund, BRL 3 billion for vehicles and workers' compensation fund, BRL 1.3 million.

Payroll loans we had BRL 1.3 billion for the Q4, and there were 2 weeks with no origination at the end of March when they were discussing the ceiling for that rate. This is our credit -- a breakdown of our credit portfolio, a very collateralized portfolio, vehicles and only to almost BRL 18 billion. That's the largest portion, a little over above payroll loan and FTTS, 17 a 45% increase, and credit cards reached 3.3 almost BRL 3.2 billion, a decrease of 18% for the year as a consequence of our strategy. The fall was even further reaching 3.3 an 8% increase in the year. We remain growing, always focusing on collateralized and more profitable items. Delinquency rates, the mix on the left, you have a growing trend in vehicles. We are only at 9% of clean credit when compared to 91 with collateral. Delinquency above 90 days. The indicators are aligned with the previous quarter and the 50/90, -- there is an important seasonality element there. It's always up in the first quarter, and then it gives off throughout the rest of the year.

On to Slide 11 now. This is a breakdown of clients with credit. Over half of our clients have this product reaching BRL 13.2 million. That's a growing trend, up 23% year-on-year. And this is a very important metric based on collateralized products. So is this on to Slide 12 now. We are at a very important level. Q4 is usually stronger to Black Friday boosting revenue from our marketplace. However, this first quarter, you have expansion of other fees basically from vehicles that have boosted that portion of services revenue. As far as credit cards go, it's on a downward fan, you have impact of more generation in Q4 of benefit cards and a smaller transaction volume in the first quarter as we're going to see further detail shortly. Insurance on to Slide 13, premiums increase. We have higher penetration as well. There's an important ratio with vehicles. Workers' compensation fund, FGTS, is expanding to and we have sold more insurance in the payroll loans as well. So the customer base with active policies reached BRL 2.4 million, up 71% in 12 months, and premiums are up by 50%.

Let me now talk about the marketplace on to Slide 14 now. Our strategy is to focus on revenue with higher tax rate. We are at BRL 65 million, even with the smaller GMV, and we have been working hard to integrate Mosaico and Mobiauto. And in the second quarter now, we're going to have the best shopping experience in a back app. And that's why because we're going to include every benefit we have, price comparison, historical prices and warnings that are available within Mosaico, it will be also available in our app, everything integrated with that credit facility.

So this is going to be a very important lever to continue to engage our customers and showing them how important our services and products are. On to Slide 15. Now credit cards. We can clearly see that restriction that started in Q4 of 2021 bringing that number down quarter after quarter, we have been reducing the number of new cards. But just like [ adu ] said, that's not the only front where we operate, but also we have been working on the limits of our current customer base. On the right, you can see the first quarter has a smaller TPV volume because we have more restrictions and revenue reached BRL 66 million when we look at overall.

Now let me talk about the other marketplace, Mobiauto. We have very positive numbers from the platform that has helped in the vehicles origination, Mobi add value, not only with shop owners, but also our customers. That journey is very homogeneous. We've already talked about mobile. It's a very nice experience for individuals that want to sell their cars more easily connecting to several shop owners. That's very simple. That's very easy. We already have 7.4 sellers operating with us at 85% increase in 12 months. When you take into account the percentage of origination of how many of those clients that finance the car went through Mobile, we are at 5.2%, combining motorbikes at 12%. We have a total of 224,000. And in the quarter, revenues amounted to BRL 16.3 million from this company of our group. And now in May, we are going to have a promotion that is very interesting, bringing benefits to customers, and we will be able to engage these customers even more and also the sellers.

The financial highlights now, that's Slide 18. That's our net interest margin. The total margin reached 12.8% due to higher volumes. But when we take into account without that session, we are at 8.7%, a very robust number. On to Slide 19. These are the top lines or the highlights. We are at BRL 1.9 billion of financial margins. That's the total, 18% when compared to the assets. If we were to exclude, we are at 13.7%, which is also a very solid number. When we take into account BDV revenue, -- we have an improvement that's being brought down to BRL 4.9 million, 4.2 million. That's the nominal value.

There's another effect that will be accounted in other expenses. These are higher discounts. They are not going to be included in this line, but they will be matched in other lines. And there are other interesting opportunities to keep customers closer, though that we deem valuable. We want to be able to continue to offer more credit, more services down the road. On to expenses. The highlight here. We had less expenses, but due to less origination in the quarter, originational expenses are down to BRL 553 million when you look at the bottom line -- adjusted net income was BRL 193 million.

ROE is 11.6%. And to conclude this first portion of our call, we had the capital slide. We are at 15.8% for the quarter. That's the equity. That shows how resilient the business is, how capable it is to grow and to leverage the operation to generate even more business is with our clients.

[Operator]

[Operator Instructions]

Pedro Leduc from Itau BBA asks the first question.

[Pedro Leduc, analyst]

My question is about payroll, loan origination and profitability. When you originate on a quarter after quarter, that was a turbulent quarter. The end picture is that originations at 40% would be BRL 2.5 billion. Now we have an intermittent cap that has been defined. I would like to better understand whether we can go back to original levels. origination levels, we had BRL 3 billion, BRL 4 billion by quarter? Or is it something along the lines of what we've seen recently, 2 billion to BRL 3 billion, of course, origination, and you have to take it to account profitability. How did you manage to manage that balance. We still have good ROE, but you would have to cut commissions by half. Does that make sense? We would like to see originate income signed loans go up because you had more sedate origination so that you sustain that long term. And I would like to better understand that flow profitability, commissions, originations, what's your take for the quarters to come.

[Carlos Pereira Guimaraes, executive]

As you well know, the consigned was from 123 to 197 in late March. We offset -- we actually have 2 origination channels. One is B2B and B2C. In B2C, we adjusted -- and we were able to be more effective in our marketing expenses to attract customers. That's for B2C and in B2B. We brought the commission down to what extent was something like 11% commission for the flat and the installments, it's now 8%, not only for Pan but also the industry as a whole decommission level, about 8%. It happened in the past. As soon as we adjusted the commission, of course, there was some reduction in the origination.

But what we expect is that we are going to go back to similar levels of origination than we had in the past. About $1 billion have consigned about $1 billion a month in April. That didn't happen, the wheel is beginning to turn, I would say, but I truly believe that we're going to go back to these origination levels. Our profitability, given these optimization exercises -- we believe that the products will have attractive profitability levels. We will remain competitive from now on. Of course, we have an internal challenge. We have been addressing it already. We want to have a bigger mix of origination in B2C, maybe 50-50, and that's going to help us as well in that sense, not only in terms of profitability but also in terms of diversification.

I think I've addressed everything origination, profitability, how we adjust it in both B2B and B2C, and we do believe it is a profitable product, good for clients, too, and it's going to grow in the quarters ahead, when we compare numbers to Q4, we had to address the lowest issue. You could have signed loans for low, that payroll loans, but that was canceled. However, discussions are still pending, and there is a possibility to return payroll loans to lowest, and that will help us bring our levels to go to EUR 1 billion a month. In that delta from Q4 to Q1, we had BRL 1 billion from Aucelio Brazil, that is part of that BRL 5 billion you see in Q4. On top of the carton beneficial, which was stronger in Q4 because it started in late September and impacted both Q3 and Q4.

[Pedro Leduc, analyst]

Congratulations for navigating through this turbulent quarter.

[Operator]

Olavo Arthuzo from UBS is up next.

[Olavo Arthuzo Duarte, analyst]

I would like to address in we see rates about 10 bps up 7.3% . What can you tell us the NPL peak? Was it the peak in Q1? Are we expecting anything different in quarters to come? Either indicates that we are close to that NPL. What do you expect as far as trends are consented.

[Carlos Pereira Guimaraes, executive]

Let me talk about the bank's businesses, and then I will combine all of them to talk about the bank as a whole. Number one, cards. We have been reducing the issuing of cards. Our PDD expenses remain high, and we are convinced that the PDD business for credit card in this year will be will decrease. In December, we'll have less than half of the average PDD expenses in Q1. This has been contracted out basically. We have better origination, reducing limits and with the more troublesome customers. So we're going to bring that PDD expenses down. It's currently underway, and we believe it will be it. That's where they create our business. Payroll, workers' compensation fund, loans, Aucelio, Brazil, these are other types of risks. It's not the traditional risk. So it's under control. It's been so for quite some time. And we don't envision any hiccups along the way, including for the Aucelio in Brazil that is completely aligned with what we expected when we started the operation. And finally, vehicles, we keep on expanding our vehicle portfolio.

We're excited about the profitability in this segment. It has always taken into account the active rate, the funding, costs and PDD expenses. So we always look at it at the ROE language. Delinquency indicator for vehicles is higher than pre-pandemic levels. But we have already priced that risk. So we remain comfortable to increase that. That's why we've done so. And given the size or the maintenance of the current level PDD expenses are absolute and at the same level. When we combine all this, we expect fewer expenses in the quarters to come, driven mostly by credit cards and vehicles, the level will remain above previous levels. However, we will be very well protected by the margins we have set.

[Olavo Arthuzo Duarte, analyst]

If I may, I would like to hear about the capital structure. You have been expanding. It's up BRL 2.158 billion. What can you tell about dividends distribution or have buyback plans? Or what would be the appropriate level for the bank?

[Carlos Pereira Guimaraes, executive]

The base scenario, if I may, as far as capital is concerned, should be about 13% of Tier 1 and about 2% offer from 12% to 13% for Tier 1 and 2% for Tier 2. But this is a more volatile environment. So that's why we have maintained a very comfortable capital level, 15.6% that will change depending on the scenario. In acts, we have available capital to address the growth we want to have provided this scenario is favorable. At times like these, we will keep on using capital conservatively, 15.6%, Tier 1. This is a very conservative capital. There are opportunities to issue Tier 2. However, we're still considering that possibility for the time being.

[Operator]

Gustavo Schroden from Banco Bradesco BBI asks the next question.

[Gustavo Schroden, analyst]

My question has to do with results and drivers. It's clear to me that the bank has shown PDD decreases as you have stated before and results are strong for our portfolio that has helped and I am in the quarter with our credit has been coming down. Despite PDD is coming down, NIM selling portfolio was robust. Bottom line remains at BRL 190 million. I was looking at the model. Since Q1 in 2021, profits remain at 190 - 195 million level. What's missing? What's lacking for the profit to go up even higher. If you look at the NIM trends considering selling portfolio that expanded fine. PDD is coming down fine, but there were some expenses that were above -- slightly above Pretax profit is coming down to quarter-on-quarter, year-on-year. How can we interpret these drivers? What do they improve and however, earnings power remains somewhat impacted the way we see it at least.

[Carlos Pereira Guimaraes, executive]

I would like to summarize that into 3 points. Number one, we are suboptimum in costs. Let me remind you that we invested heavily in 2020, 2021 in our banking, in our transactionality and given the macroeconomic scenario, we decided to reduce our origination drastically in our credit card portfolio. It's something that is very important to engage clients and to transform everything into investments in banking and into profitability ultimately. So that was our decision to postpone. So we made that investment. So that's why we remain suboptimal as far as profitability goes in the banking area. And within banking, we have credit cards that have impacted our results dramatically. As I said before, we had a PDD reduction that has been contracted out and we are very convinced it will happen throughout the year. So this will be an important driver to improve the bank's results. Let me remind you that the credit card business is different, unlike no other.

The other businesses, so customers that pay interest they balance out the results of the business as a whole, paying for those that did not pay in credit cards, you can only charge interest when customers -- when clients are in arrears. So it's a way more complex business to manage profitability, especially for medium income or low-income customers given the macroeconomic scenario we have now. We came out of pandemic with an all-time low of the delinquency. The government was injecting resources in the economy, customers can have to spend. So credit was fine. All of a sudden, 15 months later, 18 months, we had an inflation of 14%, 15% a year, inflation rates. Their lives are way more difficult. And on top of that, -- there was a huge credit card offer in the market for people that do not have that financial discipline. The deal with that supply of credit looking forward, there'll be a cleaning activity of that increased debt, if you take Central Bank, then you remove credit card, that remains flat for quite some time.

And all growth comes from credit cards in a nutshell, to 3 points, your question. Number one, our credit card results will be a lot better as time goes by. Next year, we'll be clean of these PDD digestion we are having in credit card. On top of that, we're going to issue new cards will help in customer engagement, will transform our banking investment into something that is profitable, something we haven't had so far. And finally, you had a business of vehicles in 2021 for except we had a price and expected loss that was higher than what we priced at the start. That's for 2021. For 2022 onwards, we are now including higher rates, expecting higher delinquency rate. So these are the new seasons for vehicles, new stages that will convert into higher profitability. So we are excited with the future. And as time goes on, results will get better. But we'll start next year at a different result level given these 3 reasons I've just given you.

[Gustavo Schroden, analyst]

If I may, I'd like to follow up with a comment that Inata about discounts. I was explaining the lower PPD expenses. And he talked about some discount overline -- can you clarify those discounts? Are they related to overdue credits?

[Carlos Pereira Guimaraes, executive]

Well, these discounts were between BRL 30 million, BRL 40 million higher when compared to the previous quarter. And we are very conservative when we give discounts. We take into account 2 metrics: One, is it a long-term customer? Is it important to give them that discount to keep that customer. This is one approach. The other one is, if his or her credit situation is even tighter they could return the car and pay off the debt, and we believe they will be heard, we'll get the car, and we'll give them the discount. So we take into account these 2 approaches, the customer view, whether we want to keep them or not. And if the customer is into deep trouble, they want to return the car. We accept the card, give them the discount there. They're pleased, and we are also pleased to because we believe that this amount we're getting here is bigger than what we would expect in the future given the fact that there is a depreciation of the car, the customer economic situation may deteriorate as well. So that's why we take into account that renegotiation/discount.

[Operator]

[Operator Instructions]

Pedro Leduc from Itau BBA asks the next question.

[Pedro Leduc, analyst]

My question about expenses with Orion. It was down 13%, less than originate, call about 20%. And we look in between the lines of revision those with the commission or 30% origination with the payroll loans was down 40%. So you saved a little less. I don't know whether there were other committees to other lines or workers option or vehicle. Other expenses was almost 20%. So there were less commission, but an increase in other lines. What are the drivers behind those high -- higher expenses. Is that larger share or reallocation of line I would like to better understand that mission the quarter.

[Carlos Pereira Guimaraes, executive]

Originational expenses or the payroll loans is broken down to one is flat and the other one is paid in installments. When it is flat is a direct relation of what was originated. There's some delay because origination expenses that we pay out in March refers to February. So there's a 1-month delay. That's for the flat. We are at 8% once that ceiling came down, 5% for flat, 3% for those installments. And those installments is not a function of origination. It's a function of the portfolio. So there's that difference. You cannot connect all commission expenses to whatever was originated in the quarter, either because there is that delay or you have commissions paid out in installments more efficiency coming from B2C. It does not generate a commission, but there are other associated expenses. But okay, the comparison we make here, we have a B2B business in payroll and there's the B2C business. The main difference is our number one, B2B is a commission.

It's a variable commission. And in B2C, you have personnel and marketing costs. We look at the business differently. One is commissioned. The other was people mispresmarketing. Profitability, we take into account these 2 origination forms -- and of course, when we diversify, it's way better for the bank. That's the role we're taking. B2C customers are more loyal, and they are long lasting than the B2B customer. That's how we look at the different businesses, the 2 different origination. And we are growing in B2C, and we are very excited that we're going to move on to a level in the B2C in the payroll.

For the workers' compensation funds, 65% of origination there is B2C already 35 B2B. We want to get to that level in the payroll loans as well. The message I want to like to convey is that costs will be under control. All the way to year's end, we don't see any major cost increase. We want to have even more efficiency to have more operational leverage, mostly because in most of our investments, financially speaking, have already been made. They were postponed given the macroeconomic scenario, but we expect to have the benefits down the road.

[Pedro Leduc, analyst]

Since B2C is the commission is a onetime payment? Or is it in instalments too?

[Carlos Pereira Guimaraes, executive]

In B2C, actually, we don't call it a commission. Okay, B2B, you have an originational expense. It's a commission you pay to the banking corresponding in B2B, in B2C, you have origination expense that you pay to your sales force that you have in the bank, and that's performance expense for marketing to attract performance marketing/CRM. Sell payroll loans for our base origination expense. One is the commission in B2B. And the other one is performance marketing, CRM and sales force. And that's how we make the comparison between the 2 origination.

[Operator]

Since there are no further questions, this concludes the Q&A session. I'll turn over the floor to Mr. Carlos Eduardo Guimaraes for his closing remarks.

[Carlos Pereira Guimaraes, executive]

Once again, thank you for attending our call, and I hope to see you in the next earnings call. Have a good day.

[Operator]

This concludes Banco Pan's earnings call. Thank you for using Chorus Call. Have a good day.