Banco Pan SA

BOVESPA:BPAN4

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Banco PAN's conference call to discuss the second quarter of 2021 results. This event is also being broadcasted simultaneously on the Internet, both audio and slide show, which can be accessed on the company's IR website, www.bancopan.com.br/ir and MZiQ platform with the respective presentation.

[Operator Instructions]

Forward-looking statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ from those in the forward-looking statements. Such statements speak only as of the day they are made, and the company is under no obligation to update them in light of future developments. With us here today, we have Mr. Mauro Dutra, Banco PAN's CFO and IRO; Mr. Inácio Caminha, Head of Investor Relations and Funding; and Carlos Eduardo Guimaraes, CEO. Now I will turn the conference over to Mr. Mauro Dutra, who will begin the presentation. Mr. Mauro, you may begin your conference.

[Mauro Mediano Dias, executive]

Thank you very much. Good morning, and welcome, everyone, to our conference call for the second Q of 2021. Just giving you some highlights about the quarter, we are very happy. We are advancing in the pursue of being the complete platform for low-income classes in Brazil, expanding our product offering, expanding our investments in technologies and of course, in our clients -- in the growth of our client base and the engagement with our clients.

I'll start the presentation on Slide 2 with our highlights for the quarter. Our client base reached 12.4 million clients, which represents a more than 20% growth quarter-over-quarter and more than 100% growth on a year-over-year basis.

Our credit portfolio reached BRL 32.4 billion in the quarter, which is a strong growth in our view. And the bank reported BRL 202 million of the quarter of net income, which also is an important figure.

The ROE (sic) [ ROAE ] of the quarter was 14.7% per year, and the adjusted number was 20.6%. Both numbers grow when compared to the period of this year and last year. The net worth of the bank, the shareholders' equity was BRL 5.6 billion in the quarter, growing as we generate profits and increase our balance sheet.

Moving on to Slide 3, where we bring some information about our clients, okay? The first important information, I already mentioned, this is our client base, total client base of 12.4 million clients. As you can see on the left-hand side of the slide, we kept the pace of new banking clients per business day in this quarter, depicts 40,000 new clients per day, which is the same pace of the first Q, indicating that our strategy has been very good in terms of the value proposition for the client, channels and, of course, a good experience for the clients that are setting our app.

On the right-hand side, decline in the banking clients base, which reached 8.4 million clients in June in the end of the quarter. And a new number, which is very important for us, the active clients number. We reached 51% of active clients in June. This indicates that clients are using our tools, our products and the engagement level is very good as we are growing in a very fast pace today. And even that, the active clients has been more than half of the base, and we expect this figure to keep increasing in the next quarters.

Moving on to Slide 4, a little bit more color on engagement, which is very important for us. The first number is the number of accesses in our app in the quarter, which reached 140 million accesses from our clients. This is very important as we see those access at touch points to the client in which we can understand what the client is doing. We can offer new products, and we can give him -- give them the best experience in the touch points with Banco PAN.

On the right-hand side, you can see the total transaction volume. It includes the TTV of credit and debit cards and also all the transactions clients are doing in our apps -- in our checking account. This figure reached BRL 7.3 billion in the quarter, and the run rate, if we annualize the number of June, we reached BRL 34 billion.

So clients are using that. Clients are using our products and are bringing their money to transact with us, which makes us very happy and excited for -- keep this momentum and keep growing engagement and product launching for the next quarter. Inácio will now talk about our financial highlights, and then we can listen to all your questions.

[Inácio Caminha, executive]

Perfect. Moving on to Slide 6. We'll start with the quarterly earnings main figures. We see that net interest margin reached BRL 1.7 billion, 21% per year, mainly influenced by the portfolio growth, also the levels of spreads that we have been practicing in our loans, along with the credit assignments that we've made in this quarter.

Regarding provisions, we came from 3.1% net provisions compared to the portfolio, which was our historical low, to 3.6% in this quarter, the second Q, which is still below the average. And we are very comfortable with the trends and with the levels that we have been seeing credit costs performing.

As for expenses, we came from BRL 870 million to BRL 1 billion roughly. This is mainly because of the origination that we saw bounce back in this quarter and also keeping the trend of very strong client base growth as Dutra mentioned and also the level of credit cards that we have issued in this quarter. So even with this increase in expenses, we saw a 6% increase in net income, reaching BRL 202 million, which represents 14.7% accounting ROE and the 20.6% adjusted ROE, which are very strong levels of return and keep us very satisfied with what we have been delivering.

In the next page, we see the accumulated figures for the semester. So the same trend in terms of increase in net interest margin. Also, credit costs under control coming from 5% to 3.4% over the portfolio. Expenses growing from BRL 1.25 billion to BRL 1.9 billion mainly because of expansion in client base and also in the origination. Bear in mind that all the costs that we have for new clients, we have been fully [ expensing ].

Nonetheless, net income increased around BRL 80 million to BRL 393 million in the semester, representing 14.4% accounting ROE and 20.5% adjusted ROE. So looking at Slide 8, we see how we go from the 14.7% to the 20.6%, the accounting to the adjusted ROE. Mainly, as many of you may already know, we exclude the excess of financial expenses related to the legacy time deposits that we still have on our books.

So the adjusted net income would be BRL 241 million instead of the BRL 200 million. And also the shareholders' equity that we consider is smaller than the accounting one because we exclude the excess of DTA related to losses. So with these 2 adjustments, we go from the 14.7% to the 20.6%, which better demonstrates our return.

And it's also important to remember that both figures already includes a very significant investment in client base growth. So these are very, very strong figures.

Talking a little bit about retail origination on Slide 9. We see that there was a significant increase from first Q to second Q, mainly because of payroll loan. So as we anticipated last quarter, the government made a change, returning the 5% increase that was valid in fourth Q of '20. It came back on April, and it will last until December. So this increase in the margin allowed us to originate BRL 4.7 billion in payroll loans in this quarter. And also vehicle origination kept a strong pace, totaling BRL 2.5 billion. So in total, we got to BRL 7.2 billion in new credits originated in this quarter.

Talking about the credit portfolio on Slide 10. We got to BRL 32.4 billion in June, expanding 7% in the quarter and 31% in 12 months. When you look at the different products, vehicle increased 8% and credit cards increased 26%. Personal loans is also another relevant product to be developed in the future and it already started to increase. It's still a small portfolio, but we have a lot of potential to grow here, and we launched very interesting products, which is a payroll loan with a guarantee from the severance [ that we prefund for ] employees, which is, in a way, similar to payroll loans.

So it's also secured. And it's very easy to request a loan through our app. Actually, we're the first bank to offer this in a digital way to get this loan. And this is escalating quite fast already started in July.

So it's also important to highlight here that when we look at the portfolio, 91% of it is either related to payroll or has some sort of collateral. And when we look at renegotiated loans, we are talking about only 0.4% of the entire portfolio.

So giving a very steady base to our development and also exploring other type of loans without guarantee. Talking about performance, default ratio in Slide 11. We see that the ratio [indiscernible] to 15 to 90 days decreased to 7.5%. It's still running below the historical level. Naturally, when you look at the over 90 days, we were already expecting an increase because of the movement that we saw in the 15 to 90 days in the previous quarter. But we are still running in our historical levels, even considering that we have been gradually changing the mix towards a little bit more risky portfolio, but [ rendering ] much more interest in terms of spreads.

So all the delinquency ratios are very controlled, and we are very satisfied with the performance of the portfolio. Talking a little bit about the products. On Slide 12, we have payroll loans. We originated BRL 1.5 billion per month in this quarter, totaling BRL 4.7 billion in the 3 months. Out of those, 94% related to loans, 6% related to credit cards. And when you look at the breakdown, the federal cost represents 95%.

So it's a very -- it's a volume with a lot of quality. And the social securities program-related loans represents 84% of the entire origination. And the portfolio got to BRL 15.4 billion. Out of those, BRL 13.3 billion in loans and BRL 2.1 billion in credit cards.

And as I mentioned, the extra 5% margin will be in place until December. Vehicle financing on Slide 13. We still see a very strong level of origination. So we originated BRL 138 million per month, facing a little bit of more competition, but still originated loans with a very adequate term and also down payment levels. And the strategy here is very important. So getting consistent growth, delivering quality and also much more important, delivering profitability.

The entire portfolio got to BRL 13.5 billion, expanding a little bit more -- or more in cars than in motorcycle. About credit cards on Slide 14. This is a very interesting product to explore engagement in the -- in Banco PAN's environment. So they are also very related to the checking account. We see that the new cards issued totals almost 700,000 cards in this quarter, boosted by the checking accounts. This represented not only the new credit cards, but also the other existing cards.

The total transaction volume of BRL 3.4 billion, increasing 34% Q-over-Q. And this led to a portfolio of BRL 2.6 billion in the end of June, demonstrating a lot of engagement and how the clients have been using the cards. And especially this talks a lot with our market because these clients, they come here, they initially don't have access to credit elsewhere. And then we are able to offer limits and reasonable rates using a lot of the information technology and exploring a lot of open banking opportunities, for instance.

As for insurance on Slide 15, we see that we issued BRL 160 million in premiums in this quarter, a little bit below last quarter because this usually follows the vehicle financing origination volume. But what's interesting about this movement is that the other insurance products, they have already started to escalate. So they reduced the downfall that we would see in the premium. So annualizing the second Q, we would have BRL 640 million in premiums, which is a very relevant figure comparing to what we see in the market.

And currently, we have 1.4 million clients active, using or having any sort of insurance contracted. Another thing that we have been doing regarding insurance is to deploy new products. This is a very interesting product to also create more engagement, to deliver more awareness about how to protect the client's goods or the client's credit.

And we have been -- we have a road map to deploy at least 4 more products in 2021. So life insurance, also home insurance, mobile or device insurance and income loss protection. In the end, it's very interesting to explore insurance because it translates into more service fees, boosting our results.

Talking a little bit about funding on Slide 16. We increased our base 25% in the last 12 months, reaching BRL 30.2 billion. The strategy here is pretty much about diversification, having access to different sources of funding and also benefiting from the checking account, which is still very small, but we see opportunities to increase. And then this semester was very important in our trajectory here because we were upgraded by S&P and also by Fitch.

We had 1 notched global scale upgrade by both agencies and 3 notches upgrade in local scale by both agencies. So this translates into more [ inch ] for funding, which supports our growth. And one example of this movement is that we have just issued, this month, BRL 750 million in bank notes.

We had 3x more demand, and we saw a very interesting spread compression in the book building process. So currently, we are rated AAA by S&P and AA by Fitch in local scale.

And to conclude the presentation, we have the last slide about the capital ratios. Now as we have been consolidated in BTG's economic conglomerates, we wouldn't have an individual capital ratio. But to keep the disclosure that we have always done to the market, we kept calculating and publishing our individual capital ratios, which will be 15.6% in this quarter, entirely comprised by CET1. So this -- with this, we conclude the presentation and open the line for questions.

[Operator]

[Operator Instructions]

Henrique Navarro from Santander would like to make a question.

[Henrique Navarro, analyst]

Congratulations for the results. Once again, the growth of the client base was impressive. And normally in other fintechs and digital banks stories, when we see such a kind of strong growth in the client base, there's a negative impact on G&A because of the customer acquisition cost. Well, it doesn't seem to be the case of Banco PAN. I mean you guys have been able to grow strongly, your client base without, I would say, any major negative impact on G&A.

So I would like to try to help to understand, I mean, how is this possible? Is it because you're not focusing too much on high growth, and then you are being more conscious on cost controls? But I would like to hear your thoughts on this [indiscernible] balance between the strong growth in the client base and no vis-a-vis impact on G&A.

[Mauro Mediano Dias, executive]

Thank you, Navarro, very good question. Dutra speaking here, I'll explain you. First of all, the growth of the client base is very diversified in terms of channels, okay? So we use our proprietary channels in the client base and the client flow. Of course, we already have a strong client base in credit, and we have thousands or millions of credit requests here in the bank each month.

So our proprietary relationship with clients is an important channel of new banking clients. Besides that, we have partnerships, we use performance marketing. We have organic flow. So there are many, many different channels that bring the clients and allows us to keep this -- allowed us to keep the space of new clients in the second quarter. This is the first part of the answer.

The second part is, if you look to the expenses of the bank, as Inácio explained it during the presentation, we are indeed seeing an increase in the expenses of the bank. And this increase is concentrated on the investments we are making not only in bringing new clients to the bank, of course, once a client open a checking account, we have cost with him, either the acquisition costs, either the first cost of serving this client. But also the investments in technology and products, okay? So we are seeing the expenses of Banco PAN increasing because of those investments. And we expect this will bring more profitability as the clients are increasing their engagement levels, and we are launching new products each month.

[Henrique Navarro, analyst]

Very clear. And if I may ask just one more question is on the adjusted ROE. This is a fair adjustment. I mean, actually, are you -- the same basis for -- just in my ROE. My question is on the excess of financial expenses, I understand most of it will be over after 2025. So after 2025, so we might be getting closer to the adjusted ROE when it comes to the excess of financial expenses.

But regarding the excess of the pace, honestly, I don't have such a visibility. I understand that maybe in the next 2 or 3 years, you're going to consume your entire DTA. Is this a fair assumption, maybe 2 or 3 years, to eliminate the excess of DTAs?

[Mauro Mediano Dias, executive]

To eliminate the entire amount of DTA related to losses, I think you can use 4 or 5 years. I think 2 years is true -- is not sufficient. But as you can see, we are decreasing the amount of DTA related to losses every quarter, okay? And we expect to consume, to finish this amount in 4 or in -- the next 4 or 5 years.

[Operator]

Pedro Leduc from Banco Itaú would like to make a question.

[Pedro Leduc, analyst]

Congrats on the quarter. Question on the NII. We see it grown faster during this year. If we exclude the assignments, it would have grown even faster. We estimate something around 40%, 50% year-over-year, which suggests margin expansion here or spread expansion on market mix [ with the ] same product. So if you can talk a little bit about your NII evolution, excluding the assignment process. What seems to have been a little bit higher like this and if it's [ harder to review that kind of ] [indiscernible].

And then how you are preparing for the, of course, higher funding costs that are coming in to [indiscernible] a lot of the origination of payroll is fixed rate, no hedge. But as it evolves, how you -- NII may behave in the next 12 months or so, given the higher funding cost? So if you could offset it on [indiscernible].

[Mauro Mediano Dias, executive]

Thank you very much, Pedro. Another very good question. In terms of margin, as you can see, it increased in the last 2 quarters. And you can see 2 main effects. The first one is of course the volume of credit assignments, which is a very important business here for us, and we like this business as we talk with you guys every time. And also, as you mentioned, the mix, okay? So when you look to NII and then provisions and allowance for losses, we see a very healthy movement here in the bank, and we are excited with expanding this in the next quarter.

In terms of funding costs, we have the bank entirely hedged, okay? So we priced our tractions once we have a large part of our assets in fixed rates. We price our transactions using the long-term interest rate curves, okay? So we all read the prices, all the movements in the past is decreased. Recently, it increased. But as you see in our margin, we are seeing a very healthy level of spread, and we are moving the bank into a mix more related to products with higher returns.

[Pedro Leduc, analyst]

Got it. And a quick follow-up on the assignments that this quarter picked up again, of course, together with the origination pace. And can you -- we assume that we've been assigning to price other than Caixa as well or if it's still the main positive there? Or if you will be diverse on that a little bit?

[Mauro Mediano Dias, executive]

Yes. We had credit assignments to both Caixa and other banks in the second quarter. In the first Q, we didn't have any credit assignments with Caixa, only in the second quarter. And we expect to keep this business running as we -- as I mentioned in the previous answer, the credit assignment is an important tool for us. Our work is to keep growing the credit portfolio, keep growing the engagement of the clients, but credit assignment is also part of the business, a fee business that increased our distribution capacity.

[Operator]

[Operator Instructions] Since there seems to be no further questions, I would like to turn the floor over to Mr. Inácio Caminha for his final remarks.

[Inácio Caminha, executive]

Well, thank you again for the presence. It was great talking to you here. See you next quarter, and have a great day.

[Operator]

This concludes Banco PAN's conference call. You may now disconnect, and have a good day.